Duccio Basosi Is Assistant Professor of History of International Relations

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1 2 3 4 5 6 Duccio Basosi is Assistant Professor of History of International

7 Relations at the Ca, Foscari University of Venice. He has worked 8 extensively on the international political economyofthe 1970s and 9 1980s. Between 2011and 2016 he coordinated the researchproject

10 The, engines of growth:for aglobal history of the conﬂ ict between

11 renewables,fossil,and ﬁ ssile energies (1972– 1992) , ,funded by the 12 Italian Ministry of University and Research. His publications include 13 Il governo del dollaro. Interdipendenza epotere statunitensenegli anni di 14 Richard Nixon, 1969– 1973 (2006) and Finanza epetrolio. Gli Stati Uniti, 15 , , l oro nero eleconomia politica internazionale (2012). 16

17 Giuliano Garavini is currently Senior Braudel Fellow at the European 18 University Instituteand Visiting Senior Research Fellow in the 19 HumanitiesatNYU Abu Dhabi. He headed the Paduaunit of the

20 project The, engines of growth: for aglobal history of the conﬂ ict

21 between renewable,fossil, and ﬁ ssileenergies (1972– 1992) , ,funded by 22 the Italian Ministry of University and Research. He is the author of After 23 Empires: European Integration, Decolonization and the Challenge from 24 the Global South, 1957– 1986 (2012) as well as co-editor of Oil Shock: 25 The 1973 Crisis and its EconomicLegacy (I.B.Tauris, 2016) and of , 26 L Europe et la question énérgetique: Les années 1960/1980 (2016). 27 28 Massimiliano Trentin (PhD 2008) is Assistant Professor of History 29 and International Relations of the Middle East at the Department of 30 Political and Social Sciences, University of Bologna. He works on the 31 international history of the Middle Eastand North Africa, with aspecial 32 focusonthe interplay between diplomacy, economics and development. 33 He is author of Engineers of Modern Development:East German Experts OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

, 34 in Ba thistSyria, 1965– 1972 (2010) and La Guerra freddatedesca in 35 Siria. Diplomazia, politica ed economia, 1963– 1970 (2010, 2015); and 36 editor of The Middle East and the Cold War: BetweenSecurity and , , 37 Development (2012),and L Ultimo Califfato. L Organizzazione dello stato 38 islamico in Medio Oriente (2017).Currently,heisPrincipal Investigator

39 of the PRIN National Research Grant from the Italian Ministry of

40 Scientiﬁ cResearch for the project The, Makingofthe Washington 41 Consensus: International assets, debts and power (1979– 91), . 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

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133 134 135 136 137 138 OILCOUNTER- 139 140 141 142 SHOCK 143 144 145 THEPRICE COLLAPSE 146 147 OF THE1980S 148 149 150 151 152 153 EDITED BY 154 155 Duccio Basosi, Giuliano Garavini 156 and MassimilianoTrentin 157 158 159 160 161 162 163 164 165 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

166 Thepublication of this book hasbeneﬁ tedfromacontribution 167 from theFIRB2010 Project ,Theengines of growth:for aglobal history

168 of theconfl ictbetween renewables,fossil, and fi ssile energies(1972– 169 1992), ,fundedbythe ItalianMinistryofUniversityand Research 170 (RBFR10JOTQ_001). 171 172 173 174 Published in 2018 by 175 I.B.Tauris &Co. Ltd 176 London • New York 177 www.ibtauris.com 178 Copyright editorial selection q 2018 Duccio Basosi, Giuliano Garavini 179 and Massimiliano Trentin 180 Copyright individual chapters q 2018 Duccio Basosi, Elisabetta Bini, Juan Carlos Bouè, Claudia Castiglioni, Martin Chick, Dag Harald Claes, Duncan Connors, Angela Faloppa, 181 Giovanni Favero, Giuliano Garavini, Einar Lie, Ibrahim Al-Marashi, Victor McFarland, 182 Majid Al-Moneef, Francesco Petrini, Angela Santese, Catherine Schenk, 183 Olga Skorokhodova, David E. Spiro, Massimiliano Trentin, Eshref Trushin, Henning Türk 184 The right of Duccio Basosi, Giuliano Garavini and MassimilianoTrentin to be identifi ed as the editors of this work has been asserted by the editors in accordance with the 185 Copyright, Designs and Patents Act 1988. 186 All rights reserved. Except for brief quotations in areview, this book, or any part thereof, 187 may not be reproduced, stored in or introduced into aretrieval system, or transmitted, 188 in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher. 189 190 References to websites were correct at the time of writing. 191 International Library of Twentieth Century History 192 ISBN: 978 178831 333 9 eISBN: 978 178672 411 3 193 ePDF: 978 178673 411 2 194 Afull CIP record for this book is available from the British Library 195 Afull CIP record is available from the Library of Congress 196 Library of Congress Catalog Card Number: available 197 Typeset in Minion Pro by OKS Prepress Services, Chennai, India 198 Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

199 200 201 202 203 204 205 Yet to providethe text for dedication page 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

265 266 267 268 269 270 271 Contents 272 273 274 275 276 277 List of Figuresand Tables xii 278 List of Contributors xv 279 280 Introduction Counter-Shockand Counter-Revolution 1 281 Duccio Basosi,Giuliano Garavini and Massimiliano Trentin 282 283 PART IOIL PRICES IN CONTEXT 13 284 1. Price Regimes,Price Series and Price Trends: Oil Shocks 285 and Counter-ShocksinHistorical Perspective 15 286 Giovanni Favero and Angela Faloppa 287 288 2. The Roleofthe Dollar and the Justiﬁ catory Discourse 289 of Neoliberalism 35 290 David E. Spiro 291 3. The Oil Marketand Global Financeinthe 1980s 55 292 Catherine R. Schenk 293 4. Counter-Shocked? The OilMajors and the Price Slump 294 of the 1980s76 295 FrancescoPetrini 296 297 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

x Oil Counter-Shock

298 PART II THEPRODUCERS: OPEC 97 299 300 5. Saudi Arabia and the Counter-Shock of 1986 99 301 Majid Al-Moneef 302 6. Iran and the Counter-Shock:Oil as aWeapon 303 (for Survival) 117 304 ClaudiaCastiglioni 305 7. Iraq, Saudi Arabia, and the Counter-Shock 140 306 Ibrahim Al-Marashi 307 308 PART III THEPRODUCERS: NON-OPEC 159 309 310 8. Abandoning EnforcedAutarky for Re-Insertion 311 in the World PetroleumMarket: Mexican Oil 312 Policy, 1976– 86 161 313 Juan Carlos Boué 314 9. The Double Shock: The Soviet Energy Crisisand the 315 Oil Price Collapse of 1986 180 316 Olga Skorokhodova 317 318 10. The Counter-ShockinNorwegian Oil History 199 319 Einar Lie and Dag Harald Claes 320 11. Counter-Shock or After-Shock? North Sea Oil and 321 Economics as Politics in the UK, 1973– 86 218 322 Martin Chick 323 324 PART IV THE CONSUMERS 239 325 , 326 12. Reducing Dependence on OPEC Oil: The IEA sEnergy 327 Strategy between1976 and the Mid-1980s 241 328 Henning Türk 329 330 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

Contents xi

331 13. The United States and the Oil Price Collapse of the 1980s 259 332 Victor McFarland 333 14. Backtothe Future: Changes in Energy Cultures and 334 Patterns of Consumption in the United States, 1973– 86 278 335 Elisabetta Bini 336 337 PART VENERGYAND ENVIRONMENTAL CHALLENGES 297 338 339 15. The Rise of Environmentalist Movements and the Debate 340 on Alternative Sources of Energy during the Oil Crisis 341 in the United States 299 342 Angela Santese 343 16. The RoleofNuclear Reactor Technology on the Development 344 of the Nuclear Industry and Decision Makinginthe 345 Context of the PriceFluctuations of the 1970s and 1980s 317 346 Duncan Connors and EshrefTrushin 347 348 17. ASmallWindow: The Opportunities for Renewable 349 Energies from Shock to Counter-Shock 336 350 Duccio Basosi 351 Bibliography 357 352 Index375 353 354 355 356 357 358 359 360 361 362 363 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

364 365 366 367 368 369 370 List of Figures andTables 371 372 373 374 375 376 Figures 377 1.1 Crude oil pricereferences, 1861– 201116 378 379 1.2 OPEC oil production and US price,1973– 2011 23 380 1.3 Non-OPECoil production and US prices, 1973– 201124 381 2.1 Nominal and real prices of WTI 37 382 383 2.2 Real price of WTI:OLS regression38 384 3.1 Monthly Dubai Arabian Crude price 56 385 386 3.2 NYMEX crude futures contracts daily volume of trading, 387 1983– 965 388 3.3 NYMEX WTI Crude oil at Cushing, Oklahoma, futures 389 contracts and spot price 69 390 3.4 Margin between three-month and one-month crude 391 futures contracts 69 392 393 3.5 NYMEX crude oil futures contracts: spread between high 394 and lowprices, 1983– 970 395 5.1 Price of Arabian Light before and after the 1986 crisis 109 396 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

List of Figures and Tables xiii

397 6.1 Iran:oil exports and prices, 1979– 2009 127 398 8.1 Mexico: total production of hydrocarbons and price of 399 crude oil export basket, 1972– 99 171 400 401 8.2 Mexico: fi scal income and gross petroleum industry 402 income, 1972– 99 172 403 10.1Energy consumption in Norway by sources, 1977– 2000 201 404 10.2Norway: current and capital account 210 405 406 13.1UScrude oil imports, 1970 – 2015 267 407 16.1Cost of constructionofreactorsand associated 408 lifetime costs over time 324 409 410 16.2Proportionofelectricity production by nuclearpower 411 in fi ve countries, 1970– 88 328 412 16.3Output of nuclear industry in thousandKTOESin 413 fi ve countries, 1970– 88 329 414 16.4Energy balanceinthousandKTOESin fi ve countries, 415 1970 – 88 329 416 417 418 Tables 419 3.1 Evolution of forward contracts in oil and oil products, 420 1974 – 90 62

421 422 4.1 Seven majors, control over oil 79 423 , 4.2 Crude oil production by world sten leading producers 424 in 1984 81 425 426 4.3 OPEC and non-OPEC crude oilproduction 81 427 11.1Crude oil spot prices 219 428 11.2Crude oil prices, 1950 – 2012 221 429 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

xiv Oil Counter-Shock

430 11.3 Oil: indigenous production and reﬁ nery receipts, 431 UK 1972– 80 223 432 11.4 Oil: indigenous production and reﬁ nery receipts, 433 UK 1981– 90 224 434 435 11.5 Sterling– US dollar exchange rate, 1975– 86 231 436 11.6 NorthSea oiltax revenue as %ofGDP 232 437 16.1 Cost comparison betweennuclearreactors and CCGT 325 438 439 440 441 442 443 444 445 446 447 448 449 450 451 452 453 454 455 456 457 458 459 460 461 462 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

463 464 465 466 467 468 469 List of Contributors 470 471 472 473 474

475 Duccio Basosi is Assistant Professor of History of International 476 Relations at the Ca, Foscari University of Venice. He has worked

477 extensively on the international political economyofthe 1970s and 478 1980s. Between 2011 and 2016 he coordinatedthe research project The,

479 engines of growth:for aglobal history of the conﬂ ict between renewables, 480 fossil,and ﬁ ssile energies (1972– 1992), ,funded by the Italian Ministry of 481 University and Research. His publications include Il governodel dollaro. 482 Interdipendenza epotere statunitense negli anni di RichardNixon, 1969– , , 483 1973 (2006) and Finanza epetrolio. GliStatiUniti, l oro neroel economia 484 politica internazionale (2012). 485 486 Elisabetta Bini is Assistant Professor of Contemporary Historyatthe 487 University of Naples Federico II. She has been Max Weber Postdoctoral 488 Fellow at the European University Institute (EUI)inFlorence, Research 489 Fellow at the University of Rome Tor Vergata and the University of 490 Trieste, and Visiting Scholar at Columbia University. Herresearch and 491 teaching focusonthe history of transatlantic relations, the history of the , 492 Cold War, the history of international energy policies, and women sand 493 gender history.Her publicationsinclude: Fueling the Cold War:Oil, 494 Development and Consumption in theMediterranean, 1945– 1973 495 (forthcoming)and La potente benzina italiana.Guerra freddaeconsumi OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

xvi Oil Counter-Shock

496 di massa tra Italia, StatiUniti eTerzo mondo(1945– 1973) (2013). She is 497 the editor of Working for Oil: Comparative Social HistoriesofLaborinthe 498 Global Oil Industry (with T. Atabaki and K. Ehsani) (2017). 499 500 Juan Carlos Bouè is an oil industry consultant who started his career 501 working at the international trading arm of Petroleos Mexicanos 502 (PEMEX). His professional activities have always focused on petroleum, 503 alternating betweenacademia and industry.Bouèhas written widely 504 on the industrial economics of oil and gas exploration and production, 505 and petroleum reﬁ ning industries, as well as on taxation and the 506 political economyofoil in general. His current researchconcerns 507 thegovernancemechanisms andlegal structureunderpinning 508 the international oil industry. He has been aresearch fellow of the 509 Oxford Institute for EnergyStudies since 2000,and from 2005 to 2009 510 he was special advisor to the Venezuelan Minister of Energyand , 511 Petroleumand sat on the boards of most of Petrule^ os de Venezuelaís s 512 (PDVSA) international reﬁ ning ventures. 513 Claudia Castiglioni is Research Fellow at the University of Milan. She 514 holds aPhD in History of International Relations from the University of

515 Florence (2011). Her publicationsinclude No, longer aclient, not yeta

516 partner: the US– Iranian allianceinthe Johnson years, , Cold War History 517 xv/4 (2015) and Gli Stati Unitielamodernizzazione iraniana (1960– 518 1969) (2015). 519

520 Martin Chick is Professor of Economic History at the University of 521 Edinburgh. He is author of Industrial PolicyinBritain,1945– 1951 522 (1998) and Electricityand Energy Policy in Britain, France and the United 523 States since 1945 (2007) and is currently writing the ﬁ nal volume of the 524 Oxford Economic HistoryofBritain. 525 526 Dag Harald Claes is Professor at the Department of Political Science, 527 University of Oslo. He specialises in international energy relations, in 528 particularstudies of oil-producercooperation, the energy relations OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

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529 between Norway and the EU, the role of oil in Middle East conﬂ icts, and 530 Arctic oil and gas. 531 532 Duncan Connors is Assistant Professor (Teaching) in Financeat 533 Durham University Business School. He completed his PhD in Economic 534 History at the University of Glasgow in 2009 and went on to work at the 535 Centre for Financial History at the University of Cambridge. Prior to this 536 he worked in ﬁ nance in the City of London,specialising in cross-border 537 monetary transactions and foreignexchange. His current researchisin 538 the development of nuclear powerinthe United Kingdom and the

539 economics of unconventional nuclear technologies in countriessuch as 540 Canada,Japan,Swedenand theformer Soviet states.Connors, 541 publicationsinclude the popular textbook AHistory of Money (2015) 542 and he has advised anumber of governments and institutions on 543 industrial,energy and military policy. 544 Angela Faloppa hasaBScinInternational Tradeand aMSc in

545 InternationalRelations (2013) at theCa , FoscariUniversityofVenice, 546 whereshe graduatedwithhonours with adissertationtitled Petronumbers: 547 OilStatisticsand Changing PowerRelations.She hascollaboratedwithCo. 548 As.It. CommunityServicesinBrisbane(Australia) andwithEuroreporter 549 in Brussels.She is currentlyworking foraleadinginternational company 550 in furnituremanufacturing. 551

552 Giovanni Favero is Associate Professor of Economichistory at the 553 Ca, Foscari UniversityofVenice in theDepartment of Management, 554 where he is DeputyDeanfor research and vice-coordinatorofthe 555 PhDinManagement.His research interestsconcern quantiﬁ cation 556 processes in along-term perspective,fromstatisticstoaccounting. 557 Historical methodologyand itscontributiontosocialsciences is his 558 morerecentcuriosity.Together with books, he haspublished articles 559 in thejournals Accounting History , BusinessHistory , Enterpriseand 560 Society , LaboratoireItalien, Quaderni Storici , Città eStoria ,and 561 PopolaziomeeStoria . OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

xviii Oil Counter-Shock

562 GiulianoGaravini is currently Senior Braudel Fellow at the European 563 University Instituteand Visiting Senior Research Fellow in the

564 Humanities at NYUAbu Dhabi. He headed the Paduaunitofthe

565 project The, engines of growth: for aglobal history of the confl ict 566 between renewable, fossil, and fi ssile energies (1972– 1992) , ,funded by 567 the Italian Ministry of University and Research. He is the author of 568 After Empires: European Integration, Decolonization and the Challenge 569 from the GlobalSouth, 1957– 1986 (2012) as well as co-editor of Oil , 570 Shock: The 1973 Crisis and its EconomicLegacy (2016) and of L Europe et 571 la question énérgetique: Lesannées1960/1980 (2016). 572 573 Einar Lie is Professor of Economic History at the University of Oslo. 574 He has written extensively on modern economichistory,especially 575 economic planning, policy making and business development in 576 contemporary Norway. 577 Ibrahim Al-Marashi is Associate Professor of Middle EastHistory at 578 California State University San Marcos(CSUSM), and aresearch fellow 579 at the non-profi tIraq EnergyInstitute in London.His researchfocuses 580 , on twentieth-centuryIraqi history,particularly the history of the state s 581 hydrocarbon industry,inaddition to examining this subject in the 582 , aftermath of the 2003 Iraq war. He is the co-author of Iraq sArmed 583 Forces: An Analytical History (2008),and The Modern History of Iraq 584 (2017), with Phebe Marr. 585 586 Victor McFarland is AssistantProfessorofHistory at the University of 587 Missouri. He received his BA from Stanford University and his PhD 588 from Yale University, and has served as Miller Center Fellow at the 589 University of Virginia and Dickey Center Fellow at Dartmouth College. 590 He studies oil and energy, alongwith related topics including the 591 environment, political economy,and US relations with the Middle East. 592 He is currently working on abookmanuscript that examines the oil crisis 593 of the 1970s. 594 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

List of Contributors xix

595 Majid Al-Moneef is Secretary General and amemberofthe Supreme 596 Economic Council of Saudi Arabia and served from 2003 to 2013 as , 597 Saudi Arabia sGovernor to OPEC,and from 1992to2003 as its , 598 representative to the organisation sEconomic Commission Board. 599 He wasamember of the Economic and EnergyCommittee of the Majlis 600 AshShura(ConsultativeAssembly), theChairman of theGulf 601 Cooperation Council (GCC)EnergyTeam,President of the Saudi 602 Economic Association, Deputy Dean and Professor of Economics at 603 King Saud University, and adviser to the Minister of Petroleumand , 604 Mineral Resources. Dr Al Moneef is amember of Saudi Aramco sBoard 605 of Directors, the International Advisory GroupofKing Abdullah 606 Petroleum Studies and ResearchCenter (KAPSARC), and the Oxford 607 EnergyPolicy Club. He wasamemberofthe board of trustees of the 608 Cairo-based Economic ResearchForum, the editorial board of the Saudi 609 Economic Journal and the advisory board of OPEC Energy Review. 610 611 Francesco Petrini is Senior LecturerinHistoryofInternational 612 Relations at the University of Padova, Italy. His research focuses on the

613 interplay between the socio-economic structure and the international

614 sphere. Among his latest publications are Oil:, TooImportant to be Left 615 to the Oilmen? Britain and the First Oil Crisis, 1970 – 3 , ,inJ.Fisher, 616 R. Smith, E. Pedaliu (eds), The Foreign Ofﬁ ce, Commerce and British 617 Foreign Policyinthe Twentieth Century (2016); and Imperidel proﬁ tto. 618 Multinazionali petrolifere egoverni nel XX secolo (2015). 619 Angela Santese is Research Fellow and Adjunct Professor of History of 620 European Integration at the University of Bologna. She earned her PhD 621 in Contemporary History from the Department of Political Sciences of 622 the same university.In2012 she was Junior VisitingScholar at the 623 Woodrow Wilson International Center of Washington, DC. Her 624 research interestsdeal with US foreign policy, Cold War history and 625 antinuclearand environmental movements. She is the author of La pace 626 atomica. Ronald Reagan eilmovimento antinucleare 1979– 1987 (2016). 627 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

xx Oil Counter-Shock

628 CatherineSchenk (FRHistS, FAcSS,FRSA) is Professor of Economic 629 andSocial Historyatthe University of Oxford. After completing her 630 PhDatthe London School of Economicsshe held academic postsat 631 theUniversityofGlasgow; RoyalHolloway, University of London; 632 andVictoriaUniversityofWellington; andvisitingpositions at the 633 International MonetaryFundand theHongKongMonetary Authority 634 as wellasthe University of Hong Kong.She is AssociateFellow in the 635 International Economicsdepartment at Chatham HouseinLondon 636 andhas provided policy advice to arange of national andinternational 637 governmentagencies. Sheisthe author of several booksincluding 638 InternationalEconomic Relations since 1945 (2011)and TheDecline 639 of Sterling:Managingthe RetreatofanInternational Currency

640 (2010), andco-editor of Oxford Handbook of Banking andFinancial 641 History (2016). She is projectleaderfor ,UPIER(Uses of thePastin

642 International Economic Relations) an EU/UK-funded international 643 research programme , . 644 645 Olga Skorokhodova holdsaPhD in Global History from Lomonosov 646 Moscow State University (2015).Since 2015she hasbeen teaching 647 at theSchool of Public Administration of Moscow State University. 648 She haspublished anumberofarticles on theoil crises of the 649 1970s,US – Russiarelationsand EU– Russianenergycooperation. 650 Skorokhodovawas also involvedinanumberofinternational research 651 projects on Russian/Sovieteconomic history andexternal economic 652 relations. In 2012– 13 shewas FoxInternational Fellow at Yale 653 University. Currently,she works as adviser to Nord Stream2AG, 654 theproject developerofagas pipeline systempassing throughthe 655 BalticSea. 656 DavidE.Spiro is Founding PrincipalofThe StrategyPractice,which 657 advises privateequity ﬁ rmsand ﬁ nancial services companieson 658 business strategy andriskmanagement. Before switchingcareers to 659 full-timemanagement consulting,hetaughtInternational Political 660 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

List of Contributors xxi

661 Economy,International Relations, andMiddleEast PoliticsatBrandeis, 662 Columbia, andHarvard Universities, and theUniversity of Arizona. 663 He received aPhD in Politicsfrom PrincetonUniversity,and before 664 that an MA in Politicswithacertiﬁ cate in Near Eastern Studies, anda 665 BA in Near Eastern Studies,alsofromPrinceton. Currently he is 666 Adjunct Associate Professor in theDepartment of PoliticalScience at 667 Columbia. His publications include TheHiddenHandofAmerican 668 Hegemony (1998). 669 670 MassimilianoTrentin (PhD 2008) is AssistantProfessor of History 671 and International Relationsofthe Middle East at theDepartment of 672 Politicaland Social Sciences, University of Bologna. He works on the 673 international historyofthe Middle East andNorth Africa, with a 674 specialfocus on theinterplaybetween diplomacy,economicsand 675 development. He is author of Engineers of Modern Development: East , 676 German ExpertsinBa thist Syria, 1965 – 1972 (2010) and La Guerra 677 fredda tedescainSiria.Diplomazia, politica ed economia, 1963– 1970 678 (2010, 2015); andeditorof TheMiddle East andthe Cold War: , 679 Between Security andDevelopment (2012), and L Ultimo Califfato. , 680 L Organizzazionedello stato islamicoinMedio Oriente (2017). 681 Currently,heisPrincipal Investigator of thePRINNationalResearch

682 Grantfrom theItalian Ministry of Scientiﬁ cResearch forthe project

683 ,TheMaking of theWashingtonConsensus: International assets, debts 684 andpower(1979– 91), . 685 Eshref Trushin is Senior Fellow in EconomicsatDurhamUniversity 686 Business School. He gained his PhD in Economics at Queen Mary 687 University of London in 2011 andhas also worked as alecturer at the 688 University of Greenwich. Prior to this, he worked as Chief Economist for 689 the BearingPoint– USAIDEconomic Policy Project in Central Asia and 690 as aconsultant for the World BankDevelopmentEconomics Research 691 Group. Trushin has published extensively on the subject of innovation 692 and technology in the United Kingdom and OECD nations. 693 OCS Prelims— 1/2/2018— NANDHINI.P— 571958— IBTauris

xxii Oil Counter-Shock

694 Henning Türk is aspecialist in twentieth-century international history 695 at the Centre for Contemporary History in Potsdam, Germany. He is

696 currently working on aprojectfunded by the German Research 697 Foundation about The, International Organization of National Energy

698 Policy: Great Britain and WesternGermany in the International Energy 699 Agency (IEA), 1974– 1993 , . 700 701 702 703 704 705 706 707 708 709 710 711 712 713 714 715 716 717 718 719 720 721 722 723 724 725 726 OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

1 2 3 4 5 6 7 Introduction: Counter-Shock and 8 Counter-Revolution 9 10 11 Duccio Basosi, Giuliano Garavini and 12 Massimiliano Trentin 13 14 In the mid-1980s the price of crude oil abruptly decreased by one-half. 15 Whereas in 1985 the average spot price for most varieties of crude 16 wasaround$27 per barrel, during the following year it fell to only 17 $14 per barrel, beginning alongperiod when prices would rarely climb 18 above $20 per barrel. In real terms, the price of oil had descended in afew 19 months backtothe level of 1973: higher than that prevailing in the 20 decades after World War II, but only one-third of the valuereached in 21 1980. Echoing the namethat manyobservers in the oil consuming 22 countries had applied to the price rises of 1973 and 1979– 80, in 1986 23

the then director of Planning at ENI Franco Bernabè described these

, events as a coun, tershock . 1 More than 30 years later, the making, the 25 signi ﬁ cance and the consequences of the counter-shock are the subject of 26 the chapters included in this volume. 27 Scholarshiponthe general history of the twentiethcentury has given 28 the counter-shock onlyafraction of the attention dedicatedtoits 1973 29 counterpart. In some works it seems that oil prices never descended from 30 the heights of the late 1970s. 2 But even where the fall in oil prices is 31 mentioned,itisusually presentedonlyasthe closing event of the 32 previous phaseofhighprices. 3 Whilethismight reﬂ ect some 33 OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

2 Oil Counter-Shock

, 34 unconscious notion of normalc, y as seen through the eyes of historians 35 who happen to be based mostly in consumer countries, it is also 36 paradoxical, given the importance attributed to the counter-shock in 37 many more specialisedstudies, where instead the fall in oil prices appears 38 crucial for the understanding of suchimportant processes of the late

39 1980s and early 1990s as the collapse of the Soviet Unionand the

40 dismantling of the Warsaw Pact;4 the worsening of the foreig, ndebt

, , 41 crises of many countries in the Third, World ; 5 the downsizingofthe 42 role played by the Organization of Oil Exporting Countries (OPEC)in 43 world affairs;6 and the relaunch of aworld energy regime centred on the 44 massive consumption of oil and other fossil fuels.7 At the same time, in- 45 depth studies of the dynamicsthat led to the counter-shock and framed 46 its signifi cance abounded in its immediateaftermath, but have not made 47 much progress in morerecent times.8 The benefi tofthe time passed as 48 well as the opening of relevant archives allow us today to take afresh look 49 at the events of 1985– 6. This seems all the more important today,after 50 another dramaticcounter-shock in late 2014 put an end to the escalation 51 of pricesthat characterised the beginningofthe twenty-fi rst century, 52 effectively halving the priceofcrude in only six months and bringing it to 53 about $50 per barrel, where it is at the time of this writing.9 54 Theanalysis of the1985 – 6counter-shock has usuallybeen 55 conductedalongone major line, according to which it represented the , 56 defeat of OPEC spretension, after aprotracted struggle against the forces

, , 57 of the, market ,toset the rules of the tradeofthe world smost strategic

58 commodity.10 Some authors, in particular, havestressedthat the

59 coun, ter-shock marked the beginning of aphase, lasting up to the

60 present, in which there is no single adminis, trator capable of establishing

, 61 the price of internationally traded oil, as the seven, sisters had done in

62 the decades after World War II, and OPEC after 1973.11 In short, the

63 counter-shock symbolicallymarkedthe start of anew regime in the oil, 64 market, ,one in which for the ﬁ rst time priceswere the result of the daily 65 interactions between supply and demand. To be sure,there is no , 66 question that OPEC spretension to defendboth the volume and the OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

Introduction 3

67 priceofits sales was defeated in 1985: in the face of quickly escalating 68 prices, world oil demand had stabilised at the end of the 1970s and even 69 decreased in the early 1980s, while supply from new oil ﬁ elds from non- 70 OPEC areas created aglut that was bound, at some point, to bringdown

71 the price, OPEC sshare of the oil trade, or both.12 After seeingits world

, 72 marke, tshare declinefrom 45 to 25 per cent between1980 and 1985,

73 and its ofﬁ cial price sliding from $34 to $28 per barrel, in December 1985

, 74 OPEC adopted the decision to focus on recovering marke, tshare .

75 In reality the decision was made unilaterally by Saudi Arabia, which quit

76 its role of swing, producer within an organisation that had become an

, 77 unruly resid, ual supplier . 13 In turn,the Saudi decision did bringgreater 78 sales for itself and for some other members of the organisation, but it also 79 brought large losses in revenuesfor OPEC as awhole, and the effective 80 renunciation of the once solemnly proclaimedpledgetouphold the 81 capacity to ﬁ xthe price of oil as asymbol of true sovereignty.14 The fact 82 that this introductionopens with references to the spot prices, instead of

83 OPEC sof ﬁ cial one, is testimony to such defeat. In this basic sense,

, , , 84 OPEC did succumb in a mark, et that, in the wake of the oil shocks of 85 the previous decade, had becomedeeper, broader and morediversiﬁ ed 86 than it had ever been. In the following 30 years, the structural 87 characteristics of the oil trade carried adeep imprint from these events. 88 From this standpoint, the chapters that follow integrate our 89 knowledge by adding new national and thematic perspectives on the 90 events, by using newly available archival sources, andbyenlarging the 91 scopeofthe research to coverthe attitudes and the decisions of awider 92 set of actors than those usually taken into consideration – inside and 93 outside OPEC.But in showing how the developments described above

94 occurred, all in all the chapters of this book also help us providing the

, 95 term mark, et with amore determinate meaning than that usually

96 adopted. The counter-shock and its consequences were not amatter of

97 abstract marke, tforces ﬁ nallytriumphing, as if there had always existed

, 98 an eternal and impersonal oil, market that only waited for its moment to 99 be freed from beneath the iron heel of some essentially adversarial OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

4 Oil Counter-Shock

, , , 100 category, be it the, state or politics .Onthe contrary,close analysis of 101 the dynamics that led to and followed the counter-shock indicates that it 102 cannot be understood outside the framework of the international 103 political economy of the 1970s and 1980s, with powerrelations among 104 states, ideas and ideologies, political movementsand powerful private 105 actors all playing deﬁ nite and discernible roles. It would be impossible, 106 for example, to explain the stabilisation of world energy demandinthe 107 late 1970s withoutreferring to the policies aimed at energy conservation

108 and diversiﬁ cation that consumer countriesadopted in the wakeofthe

, 109 oil, shocks ;inturn,the oil glut on the supply side derived from decisions 110 that were made either by governments and government-owned 111 companies or, again, withinthe contextofstate-led energy policies 112 which authorisedand supported the activities of private actors both at 113 home and abroad. The standards set for fuel consumption in the US and 114 elsewhere, the huge Soviet investments in Western Siberianoil ﬁ elds, the

115 favourable taxationgranted by the British governmenttothe companies

, 116 operating in the North Sea, the cheating, by OPEC countries on their

117 respectiveproduction quotas, and obviously Riyadh sdecision to open,

118 the tap, are but afew examples showingthat states were always relevant

, 119 not onlyasoperators in the, market – where it would be misleading to

120 claim that their moves were always unsuccessful – but also as actors that

121 helped deﬁ ne what the, market itself actually contained.

, 122 Moregenerally, the oi, lmarket of the 1970s and 1980s responded to , 123 broader factors at work in the world spolitical economy,aswell as in 124 culture and society. For oilproducers such as Nigeria, Mexico and Iraq, 125 for example, the need to ﬁ nanceheavy external debts by maximising 126 production can hardly be dissociatedfrom the dollar policies of the US 127 Federal Reserve that controlled global interest rates. Even countries that 128 did not have heavy foreigndebt problems, like the Soviet Union and 129 Norway, could not ignore their own budgetaryrequirements in the

, , 130 setting of oil policies. And OPEC s inability, to behaveasacohesive 131 cartel (after in 1982 it had de facto become one) is easier to understand 132 when one remembers that two of its founding members, Iran and Iraq, OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

Introduction 5

133 were at war with each other from 1980 to 1988,while Saudi Arabia and

134 Kuwait were often targeted by Iranian diplomacy as astooges of the

135 West. The actual mark, et was as much afunction of the interplay of

136 these – supposedly non-, market – variables, as afactor inﬂ uencing

137 them. In line with what the literature on the genesis of neoliberal, ism has

, 138 sometimesnoted,weshall observethat the politicity of the, market that 139 wasbeing createdinenergy wasquite visibleeven in the very words of 140 one of its great supporters (and architects). Speaking in 1982,the then 141 British Secretary of State for Energy, Nigel Lawson,declared: 142 , 143 Idonot see the Government stask as being to try to plan the future 144 shape of energy production and consumption. It is not even 145 primarily to balance UK demand and supply for energy. Our task 146 is rather to set aframework which will ensure that the market operates in the energy sector with aminimum of distortion and 147 energy is produced and consumed efﬁ ciently.15 148 149

Notonly was the choice to abstain from active energy policies presented

150

as arather deliberate one, but one can say that there, was no alternative

151

onlyatthe cost of pretending that such concepts as minimu, mdistortion

152

and ef, ﬁ ciency were not inherently political.16 Last but not least, as

153

, Alberto Cloh^ as brilliantly written, there is some hypocr, isy in assuming 154 that after 1985the level of oil prices was determined only by the interplay

155 of demandand supply: no, one [ ... ]can realistically tell what oil prices 156 would be today, if on 28 February 1991the US army had not handed

157 backKuwait its full sovereignty, after the Iraqi invasion and annexation 158 of 2August 1990. 17 This appears as true today as when it was written in 159

1997.

160

In order to stress the political economy of the counter-s, hock ,we

161

, havedecided to associate it with the term count, er-revolution in the title 162 of this collection. The 1980s markedinmanyways the end of the 163 revolutionary prospects that had raised so many hopes and fears during 164 the previous two decades, no matter how contradictory or ephemeral. 165 OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

6 Oil Counter-Shock

166 Among these,some were impacted directly by the countershock:

, 167 ideologically, the notion of economi, csovereignty as apositivegoal was 168 deeply undermined by the successful narrative of the fall in oil pricesas 169 the consequence of unfettered markets; in political– economicterms, the

170 rebalancing of North– South disparities, to be achieved in case through

, 171 the political use of rawmaterials by Third, World countries, suffered an 172 irreparable defeat when it appeared that evenOPEC – the only

173 successful, if controversial, practitionerofsuch doctrine – was now in

, 174 disarray; ﬁ nally, the planningfor an ener, gy transition – which put 175 policies and ideas in charge of steering complex social– economic 176 processes – was shelved and to an extent reversed,when massive use of

177 oil made apowerful comeback as the driver of consumptionpatterns,

, 178 and privateactors – often simplistically called the, market – were 179 handed the lead in the process. 180 The 17 chapters that form this collection address these issues in

181 greater detail. In particular, those included in Part 1take acloser look at

182 what wasmeant by oil, market in the period leading to the counter-

, 183 shock, and at the speciﬁ ccharacteristics of the free, market that then 184 came to stay. Giovanni Favero and Angela Faloppa make use of the 185 literature on the performativity of economictheory in the creation of 186 markets to highlight the political and economic impact of oil pricingin 187 the long term, and to show how the adoption of speciﬁ cmetrics for oil

188 pricing contributed to make the counter-shock the foundational moment

, 189 of anew oil, regime .David Spiro locates the run-uptothe counter-shock 190 against the backdrop of the monetary hegemony defended by the US

191 governments during the 1970s, and then deployed in instanceslike the

, , ,

192 1979 Volcker, shock and the 1985 Plaza Accord .Spiro shows on the

193 one hand how these were actual factors at play in conditioning the oil,

194 market, and, on the other, how US monetary hegemony contributed to

, 195 make the free, market avalid explanation for any event once free- 196 marketeerstook the reins of US policy during the 1980s. In her chapter, 197 CatherineSchenk focuses on the interplay between the broad tendency 198 toward ﬁ nancialisation of the world economy after the end of Bretton OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

Introduction 7

199 Woods, and the speciﬁ ctendency toward ﬁ nancialisation in the oil, 200 market, ,showing how in the early 1980s agrowing set of oil-related

201 ﬁ nancial products – not all of them successful – were launched in

, 202 London and New York, to becomethe actual indicatorsof oil, prices 203 once OPEC abdicatedtoits price-setting functionafter 1985– 86. While

204 bothFavero and Faloppa and Schenk raisethe issue of the power of

, 205 rating agencies in the post-1986 oil, market ,Francesco Petrini focuses on

206 the role played by the oil majors in the making of the counter-shock and

207 shows that, while no longer capable of monopolising the, market as they

, , , 208 once did, the seven, sisters could still wield enough market power to 209 help prices down and wrest control over oil from OPEC. 210 In the following threeparts, the policies of someofthe main 211 producers and consumers are analysed. In Part2,three crucial OPEC 212 countries are taken into consideration, in their mutual interactionsand 213 in relationship to the broader picture. In his chapter, Majid Al-Moneef 214 details the main phases of Saudi policy from the late 1970sto1985, and 215 thenbetween late November 1985 and September 1986 (when OPEC was 216 ﬁ nally able to ﬁ nd acompromise that brought prices up from the lowest

217 pointsreached during the year), to show that the counter-shock can be

, 218 interpreted as a price, war signalling anew pattern of relationship 219 between Saudi Arabia and OPEC. Based on new archival evidence, 220 Claudia Castiglioni and Ibrahim Al-Marashi discuss in their respective 221 chapters the determinants of Iranian and Iraqi oil policies, highlighting 222 for bothcountries the overwhelming infl uence of the war and fi nancial 223 problems connected with it,aswell as the importance of their respective 224 and controversial relations with Saudi Arabia. Part3takes into 225 considerationthe oil policies of four main players of the non-OPEC , 226 producers. Juan Carlos Bouéanalyses the confl icts over Mexico soil 227 governancebetween the production-oriented elementsand the rent- 228 oriented elements in theMexicangovernmentand state-owned , 229 company, and in the contextofthe country svirtual default on its 230 foreigndebt. Usingnew archival research,OlgaSkorokhodova 231 approaches the topic of the mutual interaction between Soviet oil OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

8 Oil Counter-Shock

, 232 policies and the oil, market in the makingofthe counter-shock, by 233 highlighting, in particular, the importance of (wrong) expectationsin 234 the making of the decisions conducive to the oil price collapse: the 235 widespread forecasts from the 1970sfor continuing high prices in the 236 future proved particularly damaging for the SovietUnion, which 237 overinvested in its oil fi elds and founditself in the 1980s with both the 238 need to fi nd customers and ineffi cient production management. In their , 239 article, Dag Harald Claes and Einar Lie discuss the drivers of Norway s 240 policy within the context of acountry traditionallyrich in hydro-power 241 and oriented towards oil price-taking, but also subject to pressures from 242 budgetaryconstraints and changing domestic political equilibria. Martin , 243 Chick schapter concludes this part of the volume, detailingthe dilemmas 244 of British policymakers caught betweenthe goals of conserving national 245 oil reserves on the one hand, and maximising production on the other. 246 The ultimate decision, de facto in favour of the latter alternative, was

247 made by the Thatcher governmentwhen it withdrew from active oil and

, 248 energy policies in the name of pro-m, arket policies, but also with an eye 249 at budget revenues and the exchange rate of the pound. , 250 Part 4openswith Henning Türk sanalysis of the performance of the 251 membercountries of the International EnergyAgency (IEA) in terms of 252 energy policies, as seen through US, German, and IEA records. On the 253 one hand,their policies from the late1970s had indeedcontributed to the 254 stabilisation of energy and oil demand in the early 1980s, which in turn 255 were important factors in the making of the counter-shock. On the other, 256 such policies were virtually abandoned in the early 1980s, under the 257 inﬂ uence of the new inclination,nurtured originallyinLondon and

258 Washingtonand then elsewhere, for governments not to play an active

, 259 role in markets, .Since the UnitedStates consumed some 25– 30 per cent

260 of the world sprimary energy in the 1970s to 1980s, and was the

, 261 recognised leaderofthe western, world ,itisthe subject of two chapters. 262 In the ﬁ rst, Victor McFarland discusses the dilemmasofthe US

263 governmentduring the Reagan administration, when decreasing oil

, 264 prices were hailed as apositiveresult of free, market policies ,but also OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

Introduction 9

265 fearedfor their depressing effects on the economies of the oil producing 266 states in the United States itself. McFarland shows (echoing apoint , 267 raised in Spiro schapter), that the Reagan administration opted for less

268 stringent environmental regulations and greater reliance on – now

269 cheap – oil imports in the nameof free, trade ,but also increased the

270 presence of US armedforces in the Persian Gulfinorder to let, the 271 market work, .Ofcourse, to the extent that the decrease in oil prices was 272 originally driven by diminished demand, it was not obvious that oil 273 consumption would return massively after the fall in prices.Elisabetta 274 Bini offers in her chapter afascinatingexplanation of how in the United 275 Statesasubstratum of national consumerist culture interacted with the ,

276 Reagan administration swill to ride it and expand it, turningthe

277 counter-shock into an opportunity to relaunch patterns of consp, icuous 278 consumption, – in general, and of gasoline in particular – that the 1970s 279 had put into question. 280 From different but relatedperspectives, the themes raised in Part 4 281 arealso developed in Part 5, which focuses speciﬁ cally on non-fossil 282 alternativestooil, showing how avariety of factors inﬂ uenced their

283 fortunes – or lack thereof. Both in the years leading to the counter-shock

284 and in the following period of low oilprices, the ener, gy market

, 285 contributed to shape the oil, market ,and was shaped by it. Two chapters 286 dealwith nuclear energy, which was to receive the largest share of the 287 public fi nancial support dedicated to energy diversifi cation in the 1970s , 288 and 1980s, and which grew to coveralmost one-tenth of the world s 289 primary energy supply by the late 1980s.Inher chapter, focused on the 290 US environmentalist movementbut attentive to aglobal context in 291 which environmentalism becameanin fl uential cultural and political

292 factor,Angela Santese makesaconvincing case that nuclearenergy was 293 seen as the wo, rst energy alternativesince it wasdangerous for both the

294 environment and human health,expensive and linked to military 295 technology, .From adifferent viewpoint, Duncan Connors and Eshref 296 Trushin show in their chapter that the nuclear path taken by countries 297 suchasthe United Kingdom,United States, Japan, France and the Soviet OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

10 Oil Counter-Shock

298 Union delivered different results because its outcomeswere not set, in 299 stone , butwereratherreliant on anumber of dependent and 300 independentfactors,including technicalchoices andhow these , 301 interactedwith the countries wider economy.Finally,DuccioBasosi

302 reviews the public discourse on renewable energies during the 1970s and

303 1980s to assess what kindofchallenge theserepresented to the fossil,

304 energy regime, centred on oil. While renewables were part of awider

, 305 global debate on an energy, transition then perceived as necessary, 306 Basosi concludes that they were never at its heart: coal, nuclearenergy, 307 natural gas and non-OPEC oil were – together withenergy conservation 308 – by far the most privileged sources for energy diversiﬁ cation purposes. 309 Of course,the wealth of themesthat are touched in this volume indicates 310 that the counter-shock was part of abroader picture,and the 1980s 311 themselves onlyaphase within alonger story. But the chapters that 312 follow indicate the importance of understanding that particularevent in 313 order to grasp boththe broader picture and the longer history. 314 This volume originatesfrom aconference held in Venice on 5 – 7

315 November 2015, entitled Countershock/Counterrevolution: Energy and 316 Politics in the 1980s,and sponsored by the FIRB 2010project The,

, 317 enginesofgrowth , at theCa Foscari UniversityofVenice 318 (RBFR10JOTQ_001) and Padua (RBFR10JOTQ_002), as well as by the , 319 Department of Linguistics and Comparative Cultural Studies at Ca 320 Foscari and the Machiavelli Center for International History(CIMA). 321 We wish to thank all the participants in that conference, and particularly 322 Abbas Maleki, Sang Hyun Song,Roberto Peruzzi, Alain Beltran, Mauro 323 Campus, Barbara Curli, Ugo Bardiand SergioUlgiati for their brilliant 324 papers and helpfulcomments, which have certainly contributed – albeit 325 indirectly – to make this abetter volume. 326 327 Notes

328

1. Franco Bernabè, Re, gulating theoil market afterthe Countershock:Economic 329 andpolitical factors , , InternationalSpectator xxvi/3 (1986),pp. 6 – 12. 330 Accordingtoanestablished convention,hereand throughout thevolume

363

the of ummary As affected. least the among was Arabia Saudi extraction.

362

of costs higher with countries OPEC the hardest hit revenues in losses The 14.

40. – 139 p. ,p Oil of Age The Maugeri, 13. 361

27. – 1 p. ,p Price Oil the After

360

Al-Chalabi, Fadhil See 12. (ed.), ohl nK ,i 1986 of collapse price oil world

, ,The

359 10. – 205 p. ,p Economia o, Cl 44; – 37 pp. 2010), ^

York, (New Prices Oil Understanding Carollo, Salvatore example for See 11. 358

61). .1 ,p Oil of Age The (Maugeri, historiography to than rather mythmaking

357

f mo al re he ot st ng lo be on ti ta re rp te in ch su ce, en id ev ng ti or pp su

356 any of absence the in concluded, bluntly has Maugeri Leonardo as However,

Union. Soviet the bankrupt to plot diplomatic Saudi – US orchestrated 355

ell- aw from derived counter-shock the which to according free-marketeers,

354

hard-line to dear paradoxically interpretation, alternative an indeed is There 10.

353 36. – 1 pp.

(2015), viii/39 Papers Research SPP , 2014 and 1985 between routs price

, 352

Skinner, Robert 9. four of eview ar routs: price oil of anatomy omparative

,AC

351

. 65 – 5 13 p. ,p l Oi of ge eA Th , ri ge Mau nd ;a 92 – 6 27 p. ,p 4) 00 ,2 ondon (L

s ic it ol lP Oi , ra ar oP sc ci an Fr ude cl in ks or tw en ec er or .M 63 – 0 72 pp. ), 91 19 350

, rk Yo ew (N r we Po nd ya one ,M il rO fo st Que ic Ep he :T ze ri eP Th n, gi er lY ie Dan

349

); 91 19 e, or im (Balt t ke ar lM Oi ld or eW th nd ,a es at St ed it Un he ,t PEC :O se ap ll Co

348 ce ri lP Oi he rt te Af ), d. (e hl Ko id fr il ;W 10 er apt ch ), 88 19 K, ,U ge id br am (C

s ic it ol dP an es ic Pr of rs Yea ve Fi y- nt we :T ec Op , et ke nS Ia ); 87 19 d, or xf (O 347

0 M1 WP er ap gP in rk Wo 986: f1 eo ps la ol eC ic Pr il eO th nd ga in ic Pr ack tb Ne

346

., Id ); 86 19 d, or xf (O s si ri eC ic Pr 986 e1 th of is es en eG Th t: ke ar lM Oi ld or eW th

345 and OPEC ), d. (e ro Mab rt obe ;R 84 – 7 23 p. ,p 6) 98 (1 /2 ii xv ty vi ti Ac ic nom Eco

se ap ll Co ce ri lP Oi 86 19 he mt ro sf on ss Le n so er ap sP ng oki ro ,B y, el Gat ot rm De 8.

, , 344

140. p. 2006), (Philadelphia,

343

Age urbulent aT in Sustainability Fostering Shifts: Energy Global Podobnik,

342 Bruce 8; chapter 1995), (Boston, Bottle the of out Genie The Adelman, Morris 7.

140. p. 2006), (Westport, Resource Controversial ost sM World

341

the of Future and History, Mythology, The Oil: of Age The Maugeri, Leonardo 6.

340

2002. October 2899, Paper Working Research Policy Bank World

Countries Oil-Exporting in Management Economic and Policy Fiscal ,

, 339

Tallroth, Nils Borje and Eifert Benn Gelb, Alan 5. of Economy Political

,The 338

65. p. 2008), (Oxford, 2000 – 1980

337 Collapse Soviet The Averted: Armageddon Kotkin, Steven example, for See, 4.

702. p. III, vol. 1997), (Paris, jours os àn siècle XVI du monde du sociale et

336 e

économique Histoire déboires. et Victoires Bairoch, Paul 1232; p. 2008), Bari,

335

(Roma- internazionali relazioni delle Storia Nolfo, Di Ennio example: for See 3.

334 1995). (London, Extremes of Age

The Hobsbawm, Eric in nor 2006), York, (New Capitalism Global Frieden, 333

Jeffry in collapse price oil the to reference no virtually is there example, For 2.

332

l oi y. el iv ct pe es ,r il eo ud cr of rs te or xp te ne d

, , an ,

331 e ud cr of rs te or mp ti ne to ts cu rt ho ss da se eu ar s er uc od pr d an s er um ns

, , , , ,co

11 n troductio In

oductio Intr OCS NANDHINI — 2/2018 1/ — n IBTauris — 571959 — .P OCS Introduction — 1/2/2018— NANDHINI.P— 571959— IBTauris

12 Oil Counter-Shock

364 various positions is in Alberto Clo,^ Economia epolitica del petrolio (Bologna, ,

1997), pp. 209– 10. On the symbolic value of OPEC spricing policies in the

365

,, context of the Third, World sstruggle for economic independence, see 366 Giuliano Garavini, After Empires: European Integration, Decolonization, and

367 the Challenge from the Global South 1957– 1986 (Oxford, 2012), chapter 5. 15. Nigel Lawson, energy speech, 1982, quoted in Rupert Darwall, How, to run a

368 country. Energy policy and the return of the state, ,Reform Research Trust 369 paper, November 2014. Available at http://www.reform.uk/wp-content/

370 uploads/2014/11/Energy-Report_text_AW_WEB1.pdf (accessed 21 July 2017).

, 16. On the creation, of free markets the classic reference is Karl Polanyi, The 371 Great Transformation: The Political and Economic Origins of Our Time 372 (Boston, 2001) [ The Origins of Our Time: The Great Transformation 373 (New York, 1944)]. More recently: Mark Blyth, Austerity: The History of a Dangerous Idea (New York, 2013). 374 17. Clo,^ Economia,p.68. 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 391 392 393 394 395 396 OCS Part_1— 1/2/2018— NANDHINI.P— 571960— IBTauris

1 2 3 4 5 6 PART I 7 8 OILPRICES IN CONTEXT 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 OCS Part_1— 1/2/2018— NANDHINI.P— 571960— IBTauris

34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

1 2 3 4 5 6 1 7 8 9 10 PriceRegimes, PriceSeries andPrice 11 Trends: Oil Shocks andCounter-Shocks 12 13 in Historical Perspective 14 15 16 Giovanni Favero and Angela Faloppa 17 18 Metrics and Meanings 19 The institutional means historicallyadopted to ﬁ xoil prices intertwine 20 with the metrics adopted to produceprice series, and the resultingtrends 21 exerting their effects on demand and investments. Only considering 22 these threeelements in their reciprocal interrelations in the long term, it 23 becomes possible to understand the dynamics of the oil shocks and 24 counter-shock of the 1970s and 1980s. 25 The methodological approach here adopted makesreference to the 26 sociology of knowledge and in particular to the literature on the 27 performativity of economictheory in the creation of markets, and on 28 the constitutive effects of historical quantiﬁ cation processes.1 In such a 29 perspective, pricemetrics play in their turn the role of institutions, 30 i.e. rules on which analysts and operators agree in order to quantify 31 and make acomplex mechanism understandable. Prices, as measured 32 following these procedures, are theninterpreted as aboundaryobject, 33 OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

16 Oil Counter-Shock

34 35 36 37 38 39 40 41 42 43 44 45 Figure1.1 Crude oil price references, 1861 – 2011 ($/bbl). Source: BP, 46 Statistical Review of World Energy (London, 2016). 47 48 performing differentfunctions and being at the same time the result of 49 temporary agreements between sellers and buyers, the material of further 50 statisticalanalysis andelaboration into series, and a signal to decision 51 makers and/or market operators. 52 The meaning of longhistorical series of prices is one favourite subject 53 of arguments and controversies between historians and social scientists. 54 As the lateAlain Desrosièresput it, the conventions of equivalence that 55 make data comparable become sometimes dubious, as not only metrics 2 56 but alsotheir objects change over time. 57 As wellknown,the secular series of nominalcrude oilprices 58 arethe result of apatchwork puttingtogether very differentdata. 59 In theBPseries (Figure1.1), an averageofUSposted prices (the 60 priceatwhich companieswere buying or sellingoil,inthe absence of 61 an ofﬁ cial exchange)isusedfrom1869 to 1944, then theposted 62 priceofthe benchmark crude ArabianLight Crude at RasTanurais 63 used up to 1983,and since 1984 theinternational market price 64 (the priceper unit of atraded qualityofoil in theinternational 65 exchangemarket) of thebenchmarkcrude Brent Dated is used.The 66 historicaldatapublished by ENI or OPEC arevery similar, even if OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

Price Regimes, Price Series and Price Trends 17

67 sometimes adifferent benchmarkcrude as West TexasIntermediate 68 or others is used. 69 Such astatistical inconsistencyisusually justifi ed with regard to the 70 economic andpolitical relevanceofthe resultingassembled trend, whose 71 meaningfulness is theoutcome of thejuxtapositionofnon-comparable 72 data.However,statistical problems concerning thesourceofprice data do 73 notexhaust theinconsistencies of long historical series of crudeoil prices. 74 It is thesamemeaning of theprice of crudeoil that changesovertime. 75 In this perspective,itispossibletoidentifydifferentprice regimes, 76 whichdonot correspond to thestatistical periodsidenti fi ed above. From 77 theinterwarperioduntil the1950s,price formulas made referenceto 78 differentgeographicalbasepointstoadd fi ctionaltransportationcosts and 79 protectthe higher priceofUScrude from foreigncompetition.The 80 referencetoUSdomesticpriceswas maintained,yet thegrowing 81 importance of crudeoil production in theMiddleEastshifted thefocus of 82 price fi xing on thecalculation of royaltiesand taxesthatthe oilmajors 83 owed to thegovernments of theMiddleEastcountries:postedpricesinthe 84 PersianGulfthusbecamethe basistocalculate thetax paid cost.After the 85 1973 shock, OPEC maintained thesamesystem, butexcludedthe majors 86 from thenegotiations. Such asituation lasted untilthe mid1980s,when 87 theOPECpricing system was fi nallydismissed, in favour of prices directly 88 defi nedoninternational exchange markets. 89 The details of this shift and the construction of a market price 90 for oil will be discussed moreindepth below. The literature on the 91 performativity of economictheory suggests that models and algorithms 92 havethe ability to createmarkets.3 Making reference to this debate from 93 aconventionalist perspective, we aim here at demonstrating that market , 94 logic is onlyone of the many possible raisons d être Â; of oil prices.4 95 Suf fi ce it for the moment to highlight that the fi xing of the posted price of 96 oil followed avery different logic in 1950and in 1980. In the same way, 97 the role of fi nancial instruments in determining benchmark prices has 98 changed radically from the 1970stotoday.Asaconsequence, also the 99 continuity of the statistical reference can hide important transformations OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

18 Oil Counter-Shock

100 in its meaning, and statisticaldiscontinuities may or may not refl ect an 101 actual change in price fi xing practices. 102 Aiming at disentangling the metrics, the meaning and the political 103 and economicimpact of oil pricing in the longterm, this chapter uses the 104 specialisedliteraturetoreinterpret the evolution of the systems for fi xing 105 posted and correlate prices from the 1960s to the 1980s, then focuses on 106 the emergence of aspot market for crude oil and of an interconnected 107 futures market, concluding with some general considerations on how the 108 interplay between the metrics in use made of the oil counter-shock the 109 foundational moment of anew oil regime. 110 111 112 Posted Prices as Non-Market Prices

113 The pricing systemfor internationally traded oil before the 1970s has 114 been deﬁ ned as an, economiclogic that never corresponded to realitybut

115 which at fi rst was close enough to be invested with ameasure of 116 plausibility, . 5 Since the late 1920s aseries of oligopolisticagreements 117 fi xed prices using a fi ctional basing point: the Gulf Plus in the 1930s, and 118 other Equalisation Pointsafter World War II. Such asystemallowedthe 119 majors, i.e. the largest multinational oil companies, to accumulate profi ts 120 to fi nance their vertical and horizontal expansion. 121 After World WarIIthe international trade of oilradically changed, 122 as Venezuelan andMiddleEastern crudes fi nallyreplacedUSoil 123 exportstoEuropeand Asia.The protection of theUSdomestic oil 124 production wasthenensured by asystem of mandatory importquotas 125 becomingeffective in 1959, 6 whilethe majorswentonextracting 126 oilall over theworld accordingtothe termsofthe concessions. Such 127 agreementsweregenerating increasing revenues also forthe 128 governmentsofthe host countries. Until1950, theirshare was defi ned 129 in termsofafi xed royaltyper metricton.Thisway,theyhad no relation 130 at all withthe prices at whichthe crude oil was sold,usually to 131 downstream subsidiariesofthe samecompany or following long-term 132 contractswithbuyers. OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

Price Regimes, Price Series and Price Trends 19

133 A fi rst change happenedinthe early 1950s,with agradual shift to 134 posted pricesasabasis for the calculation of ad valorem royalties and of 135 income taxes.Posted pricesatthe time were unilaterally made public in a 136 conventional way by the seller (theWesternmajor) to give notice that it 137 waspreparedtoaccept acertain sum for abarrel of crude oil.7 In October 138 1950, Mobil was the fi rst oil company to post its price for the Iraqi 139 Kirkuk crude, which was followed in Novemberbyaposting for Arabian 140 Light Crude. The introduction of postedprices was mainly related to the 141 spread in the Middle East of the so-called 50/50 agreement, including an , 142 ad hoc tax rate on the concessionaires net income. The posted price was 143 thenused as atax reference price to calculatethe payments the majors 144 owed to the hosting countries. Even if posted priceswere not initially 145 usedinall the 50/50 deals (introduced fi rst in Venezuela in 1948 and in 146 1950inSaudi Arabia),by1955 allconcessions contained a50/50 clause 147 based on the posted prices. They emerged as the best solution to provide , 148 atransparent basis for the assessment of the majors profi ts. Proper 149 market transactions were in fact extremely rare at the time,and the 150 majors preferredtomaintain the secret about the terms of long period 151 contracts with downstream buyers.8 The only viablealternativereference 152 were the internal transferprices betweensubsidiaries of the same parent 153 company, yet they were in their turn performingadifferent fi scal 154 function, as the Western authorities required to reportthemtoavoid tax 155 evasion. So we may argue that the posted price emerged purposefully to 156 assess the redistribution issues betweenthe majors and the hosting 157 countries without interference. 158 Historians of statistics know that whenever aquantitative indicatoris 159 usedtoautomatically assess abargainedissue, or to depoliticise it, sooner

160 or later the same indicator becomes the object of bargaining and political

161 confrontation. 9 In the same way, price, sused as numbersin ﬁ scal 162 formulas tend to becomesomething other than prices , . 10 Indeed, as 163 posted pricesbecamethe only basis for the assessment of the taxrevenue 164 of hosting countries, they were less and less inﬂ uenced by the trends and 165 levels of supply and demand. OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

20 Oil Counter-Shock

166 In 1960 OPEC was createdinreaction to the cuts to postedprices 167 decided by the majorsin1959 and 1960. Taxes androyaltieswere a 168 nationalinterest to be protected, and the ﬁ rst task of the newly 169 established international organisation was to avoid any further unilateral 170 cut to postedprices. In 1964, OPEC was able to change the calculation of

171 the majors taxable proﬁ ts. Starting from that year,royalties were no

172 longer detracted ( credit, ed )from proﬁ ts before calculating the amount

, 173 of taxes due to the hosting country, but expensed, apart. This way, the 174 fi nal government take resulted increased by half of the royalty rate in a 175 50/50 tax agreement.11 176 Such changes went together with an accelerated increase of the world 177 demand for oil from 1965 to 1970,and with aparallelexpansionof 178 production, in particularbyOPEC countries. Such expansioncreated 179 concernsabout the exhaustible nature of oil reserves in producing 180 countries, exerting an infl uence on their production and pricing policies. 181 The growingtensions on pricing issues for different crude oils took to the 182 Tehran and Tripoli regional agreements in February and April of 1971. , 183 FollowingOPEC sthreats to cutoff production,incometaxes were 184 increasedto55per cent,postedpriceswere also increasedand theirfurther 185 annual increase wasprovidedtocompensatein fl ation. Such agreements 186 hadascarce fi nancialimpact, yetsignalled theestablishment of anew 187 powerrelationshipbetween themajorsand OPEC.They also included a 188 plan forthe administration of prices to last until1975, irrespective of 189 variations in supply anddemand.12 Butthe followingeventsprovedthata 190 fi ve-yearspanwas toolongfor planning in turbulenttimes. 191 In August1971,the oilproducingcountries perceivedthe , 192 cancellation of the US dollar sdirectconvertibility into gold and the 193 increasing dollar infl ation as adirect threat to their nominal incomes. 194 In October 1972OPEC countries asked then for aparticipation share in 195 the upstream operations of their concessionaires, and so were endowed 196 with aproportional quantity of crude oil theycould sell back to the oil 197 companies or to third party buyers.13 The 1972 participation agreement 198 opened a fi rst crack in the vertically integrated structure of the industry, OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

Price Regimes, Price Series and Price Trends 21

199 paving the way to the future emergence of aproper market for crude oil. 200 Yet its immediateconsequence was the appearance of threedifferent 201 prices for abarrel of oil: the posted price,the government or offi cial 202 selling pricetothird parties, and the fi gurative buy-back price for the 203 part of the governmentoil share that the majors were actually 204 retaining. 14 In theabsenceofadequatemarketoutletsand of 205 transparency of information on oil transactions, the majors could 206 enjoy windfall arbitrage profi ts. 207 In September1973, the OPEC countries demanded arevision of the 208 1971Agreements and asubstantial increase in the postedprice level. The 209 outbreak of the Yom Kippur Arab– Israeli War, however, changed the 210 terms of the matter, leading OPEC membercountries to discuss among 211 themthe fi xing of anew level for posted priceswith reference to specifi c 212 governmenttaketargets, and with the aim of preserving oil reserves.15 213 When fi nally fi xing the price levelat$11.75 per barrel in December 214 1973, almost four times the 1972 price, OPEC identifi ed also for the fi rst 215 timeamarkercrude, namely the Arabian Light 348 API. Its posted price 216 would be the benchmark to which all the offi cial selling pricesofmember 217 countries would be linked, discounting or adding differentials.16 In the 218 following decade, administering the differentials becameamajor issue 219 inside of OPEC, leading to atwo-tieredpricing system for the same 220 Arabian Light Crude, as abenchmark reference for others, and as an 221 actual commodity.17 222 The nationalisation of oil concessions in mostOPEC countries 223 during the 1970smade the situation even more unstable,disrupting the 224 vertical integration betweenthe upstream and the downstreamsectors of 225 the industry. This createdthe room for aproper pricingsystemuseful to 226 coordinate the growing volume of transactions concerning crude oil. 227 At the same time,the oil companies found themselves crude-short and 228 dependent on OPEC supplies,while OPEC members started fi xing 229 production ceilings in order to preserve their reserves. 230 The Iranian Revolution markedaturning point, reducingsince late , 231 1978someWestern companies direct access to alarge part of Middle OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

22 Oil Counter-Shock

232 East oil. In the absence of any effective expansionofOPECoil supply, 233 these companies were thenforced to resort to the narrow and volatile 234 spot market, where prices boomed, driven by panic buying of the small 235 amount of crude then available on the spot.The majorsthat still 236 maintainedlong-term contracts with the producing countries were then 237 able to make huge speculativeprofi ts on the differentials betweenposted 238 prices and spot prices.Byreaction, OPECcountries started to 239 unilaterally adjust their offi cialselling prices running after the spot 240 market as if it refl ectedthe actual conditionsofsupply and demand. 241 OPEC itself followed, adjusting the deemed marker pricefrom $12 per 242 barrel in January 1979 to $28 per barrel in December, and then 243 increasing it up to $34 per barrel in late 1981.

244 This way, OPEC was perceivedasindirectly assigningcredibility to

, 245 the false signals arriving from the upwardprice trend in a ma, rket that 246 was mostly driven by speculativepanic and very far from being 247 representative of the relationship between the whole supply and , 248 demand.18 In this regard, it is possible to argue that the economists 249 growing insistence during the 1970sand 1980s on the efﬁ ciency of 250 market coordination, and the related emergence of new theoretical

251 models, had aperformative effect pushing the political actors in charge of

, 252 fi xing pricestotake the, market as areference.19 However, the point we 253 are making here concerns the interaction betweenthe different functions 254 that the oil price exerts as amarketsignal, a fi scal reference or aquality 255 benchmark. Such interaction changes following the shift of the focus 256 from onefunction to the other, creating inconsistencies and short- 257 circuits that may foster andexplain abruptvolatility. It is the case in the 258 early 1980s with the gradual shift of the focus to the spot marketprice, , 259 the failure of OPEC sattempts to segment the different functions of the 260 oil price,and the subsequent counter-shock. 261 In March 1982 OPEC fi nally fi xed one single postedprice for the 262 marker oil at $34 per barrel and acap on OPEC production, with Saudi 263 Arabia acting as aswing producer in order to maintain price stability. 264 Only in 1983 it allocated production quotas to single member countries. OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

Price Regimes, Price Series and Price Trends 23

265 266 267 268 269 270 271 272 273 274 275 276 277 278 279 280 Figure1.2 OPEC oil production and US price, 1973– 2011. 281 282 Such adecision responded to the abrupt downward change of the price 283 trendinthe spot market. This resulted from the decline of world oil 284 demand from 64 millions of barrels per day (mb/d) in 1979 to 58 mb/d in 285 1983, due both to the oilsaving policies and to the economicrecession of 286 OECD countries.20 At the same time, the development of deposits 287 dismissed as prohibitive before 1973 caused asurge in the supply from 288 non-OPEC regions (Alaska, the North Sea and Mexico) ﬂ owing into the 289 spot market. The OPEC share of the world oil market fell from 51 per 290 centin1979 to 28 per cent in 1985 as aresult of this and of its own 291 decision to limit production to support prices (Figures 1.2 and 1.3).21 292 While most OPEC countries could cheat on their quotas, Saudi 293 Arabia suffered most the competition of the now cheaper non- 294 OPEC crudes. Saudi oil sales at the agreedmarkerprice declined from 295 10.2mb/din1980 to 3.6 mb/d in 1985, in spite of acut of the benchmark 296 priceto$29 per barrel in 1983. Such adeclinewas also the consequence 297 of growingcompetition among OPEC countries for sales volume.Taking OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

24 Oil Counter-Shock

298 299 300 301 302 303 304 305 306 307 308 309 310 311 312 313 Figure 1.3 Non-OPECoil production and US prices,1973– 2011. 314 315 notice of this, in 1985 Saudi Arabia fi nallyabdicated to its role of swing 316 producer,shiftingfrom pricesupport to volume support and 317 abandoning the posted price for anet-back pricingformula.22 Following 318 anet-back contract, the buyers would pay aprice per barrel depending 319 on their fi nal earnings minus refi ning and transportation costs. Aunitary 320 profi tmargin being included in the formula, buyers had astrong 321 incentivetoexpand sale volumes regardless of price levels. Net-back 322 pricing wasthen by defi nition very far from working as aproper market 323 signal. Despite the volume cap imposed by Saudi Arabia on its net-back 324 sales, such deals spread quickly in the industry.23 This lead to an 325 oversupply of tradable refi ned products, pushing down their price.And 326 this fi nallyaffected backthe price of crude oil on the spot market, 327 pushing it to collapse from $26.69 per barrel in July 1985 to $9.15 per 328 barrel one year later.24 329 The proper counter-shock was then the result of apolicy adopted by 330 the producers that explicitly made of the price adependent variable. The OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

Price Regimes, Price Series and Price Trends 25

331 wrong assumption was that pricing systems could be segmented 332 following their purpose. Evenifthe net-backformula was applied to 333 specifi ctransactions, it affected the volume of supply, triggering a 334 reaction in the markets for related products and fi nally reverberating on 335 the spot market for crude. 336 Tryingtoreact to the catastrophic price collapse, in December 1986 337 OPEC restoredabenchmark for offi cial selling prices at $18 per barrel, 338 resuming production quotas and assigningagain to Saudi Arabia the role 339 of swing supplier.Yet in January 1988,under threat from its Aramco 340 customers, Saudi Arabia offi cially adopted prices related to the spot 341 market, soon followed by other OPEC countries. By March 1988the

342 OPEC ﬁ xed price systemhad sunk, leaving the stage to what had

, , , 343 emerged as the, market as the only administrator of international oil 344 pricing.25 345 346 The Spot Market and its Financial Layers 347 The oil counter-shock of the mid 1980s wasdeeply intertwined with the 348 deterioration of the OPEC fi xed price system and with the parallel 349 emergence of an international exchangemarket for crude oil. This found 350 , its origin in the spot market, where arm slength deals were concluded 351 at prices differing from the administered ones since the 1950s.From a 352 quick and convenient way for the majorstocorrect minor planning 353 errors in the produced volumes of crude,between the 1960sand 1970s 354 thesizeand scope of thespotmarketconsiderablyincreased. 355 Independent companies and refi ners with no direct accesstocrude 356 usually resortedtoitasbuyers, and since 1972 the exporting countries 357 lacking the necessary outlets and downstream infrastructures to dispose 358 of their newly acquired equity oil joined the spot market, usually selling it 359 at alower price than the offi cial one. 360 The growing number of transactionscertainly contributed to 361 increasing the transparency of the spot market, but as Francisco Parra 362 convincingly shows, it is diffi cult to assess how much oil was actually 363 OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

26 Oil Counter-Shock

364 traded during the 1970s.26 Even price data are uncertain, as the spot price

365 level reported by the trade press was actually based on the offers,bids and

, 366 sales observedbytraders and brokers. This mar, ket wasstill very thin, 367 not institutionalised, and there were no solid referencepoints.However 368 it wasalready regarded as an indicator of the waythe wind wasblowing. 369 The OPEC increase of the posted price in December 1973did also take 370 into account the high prices realised on the spot in the previous weeks.27 371 At the end of the 1970s,the disruption of the vertically integrated 372 structure of the oil industry,followingthe nationalisations and the 373 Iranian crisis, fi nally shifted the focustothe spot market as areference. 374 Yet what pushed prices up on the spot in 1979 was panic buying. 375 OPEC was generallyhostile towards the spot market as asource of 376 speculativevolatility, yet it maintained some ambiguity. It was in fact 377 OPEC itself that compelled the majors to resort to the spot market by 378 limiting their production quotas. At the same time,ifSaudi Arabia, 379 Algeria, and Venezuela abstainedcompletely from spot crude sales, other 380 OPEC membercountries, such as Abu Dhabi and Kuwait, were not able 381 to resist the temptation of reaping the difference betweenthe spot prices 382 and their offi cial ones. And the upward trend of spot priceswas put 383 forward by OPEC as ajustifi cation to raise its own price fl oor, as 384 discussed above. 385 In the early 1980s, it was the increase of non-OPEC oil supplies and 386 their shift from long-term contractstothe spot market that pushedthe 387 expansionofthe latter and reduced its volatility. One-off deals were 388 replaced by serial transactions based on standardised contract terms, 389 such as in the case of the WesternTexas Intermediate (WTI) contract, 390 providing for the delivery of acargo at Cushion, Oklahoma, within an 391 agreed time period and at aspecifi ed price,declared in dollars per barrel, 392 or the BrentDated for North Sea crudes delivered at the Sullom Voe 393 terminalinScotland. 394 Sidebyside with the spot market, also avariety of over-the-counter 395 forward contracts emerged. An example is the 15-day Brent, which , 396 provided aminimum15days notice betweenthe deal and the loading OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

Price Regimes, Price Series and Price Trends 27

397 date of an oil cargo, to be paid at a ﬁ xed price up to threemonths later. 398 However, such contracts becameactually viableonly when they were

399 standardised into aregulatedfutures exchange market. This provided a

, 400 daily marking, to market of the contractposition, and secured it by 401 requiring adepositthat covered eventual corrections. At fi rst, futures 402 were introduced for oil products,specifi callyfor gasoil by the New York 403 Mercantile Exchange (NYMEX) in 1978, followed by the ICE of London 404 in 1981; then, crude futures followed, with the WTI contract launched by 405 the NYMEX in December1982,and the Brent Dated contract created by 406 the International PetroleumExchange (IPE) in London in 1983. 28 407 The introduction of futures contracts wascrucial to allow the fi nal 408 development of aproper market for crude oil. Single physical crudes as 409 WTI or Brent may in fact still have arelatively low numberof 410 transactions on the spot market, but the development of aregulated

411 ﬁ nancial marketfor their futures attractedsuch avolume of investments

, 412 on paper, barrels to assure liquidity and allow price reporting agencies to 413 collect transparent and accurate information. The ﬁ nancial mechanism 414 of futures contracts assuredalso the convergence of futures and spot

415 prices at the expiry date of the former even if the contractwas settled in

, 416 cash and not in wet, barrels . 29 417 Therefore, in the mid 1980s a market for crude oil ﬁ nallydeveloped 418 in the structured form it had lacked in the previous decade, without any 419 direct contribution by OPEC, whose administeredoil pricing system was 420 in the meantime having its swansong. Whenadministered prices 421 collapsed in 1985 following the adoption of net-back pricing by most 422 OPEC countries in competition among them, the attempttomaintain a 423 separate pricing system proved delusive.The resulting oversupply ﬁ nally 424 affected also spot prices through the fall of related oil products, as

425 explained above.

, 426 The results of net-back pricing left the, market as the only residual 427 viableprice reference after the counter-shock. The last missing step was 428 the adoption of aprice formula relating benchmarkcrudes to differentoil 429 qualities. In 1986,the WTI price on the spot market started being usedas OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

28 Oil Counter-Shock

430 abenchmark for formula pricing by PEMEX, the Mexican national oil 431 company, who refused to adopt the net-backpricing system to avoid the 432 possible corruption of its offi cials during the long negotiations with US 433 buyers.30 The Brent Dated soon becameinits turn the main benchmark 434 for European buyers. The role of benchmark crudes tradedonthe spot 435 market was similar to the one the Arabian Light performed with , 436 reference to OPEC sof fi cial selling pricessince 1973, with the only and 437 signifi cant differencethat the price of the new markers was the direct 438 result of demand and supply interaction on the international spot and 439 futures exchangemarket. 440 As mentioned above, the failed attemptbyOPEC to reestablish some 441 sort of fi xed-price regime in 1987 sanctioned the ultimate supremacy of , 442 the market-related systemfor oil pricing. Was it amatter of OPEC sloss 443 of market power,orofits scarce cohesion? Both the elements were 444 present in the late 1980s. 445 After the counter-shock, volatility became the rule,with alternate 446 cycles of prices,marked by different events exerting their infl uence on

447 the market. In such acontext, OPECcontinued to exert an inﬂ uence on

448 oil price levels as a residual, supplier, covering that part of demand

449 which could not be satisfi ed by non-OPEC production (the so-called call, 450 on OPEC, ). Its production quotas were set trying to anticipate the 451 magnitude of such residual demand, and oil pricesalso fl uctuated based 452 on the accuracy of this assessment. Such arole emerged in 1990,when it 453 was able to offset the lossinsupplies followingthe burst of the Iraq– , 454 Kuwait confl ict by expanding other member countries production.31 455 Following the same logic of price stabilisation,production quotas were 456 instead reduced in 1998 in reaction to the collapse of oil demand

457 followingthe Asian crisis. 32

, 458 It is possible to argue that OPEC was able to act as a swing, producer 459 wheneveritpursuedlong-term stabilisation targetsrather than short- 460 term proﬁ ts, as the latter approach stirred internal competition among 461 membercountries. Afurther point worth to be highlighted is the crucial , 462 role of OPEC sexplanations of its measures. Not onlythe choicetocurb OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

Price Regimes, Price Series and Price Trends 29

463 or expand production, but also its explicit justifi cation affects market 464 expectations, followingasimilar mechanism to central bank 465 communication. 33 466 467 ARegime Change 468 When considering theoverallevolution of oilpricing systems, 469 anyinterpretation of oilprice concepts must be related to the 470 characteristics of thesurroundinginstitutional system. This is generally 471 validfor prices, as forother quantitative indicators,whenever they 472 perform differentinstitutional purposes at thesame time.From a 473 conventionalistperspective,the (formal or informal) institutional 474 arrangements reconciling thedifferent functionsofpricesare subject to 475 disruption andrenegotiationfollowing thedissatisfaction of oneor 476 moreactors. 34 In thecase of rawmaterials, trade-offs and 477 incompatibilitieshavehistoricallyemerged between theroleofprice 478 as taxation referenceand market signal. This resultsclearly from the 479 empirical studies on thematter, even if they adoptdifferent economic 480 perspectives.35 481 From this perspective, the study of price movementsshould allow to 482 use changes in their assessment as asignal of amore general regime 483 change. Yet assuming amechanical relationship betweenpricing systems 484 and price regimes would be very far from reality. It is truethat, in the case 485 of oil, the transition from one pricingsystemtoanother has occurred in 486 correspondencetomajor shifts in the contemporary economicand 487 political framework, endowing every price regime of great specifi city and 488 signi fi cance.36 489

But dating these shifts results much more difﬁ cult than expected, and

490

, alarger transit, ion period should be identiﬁ ed from the posted price to 491

the marketprice,spanning from the 1970s allalong the 1980s. The two

492

, oil shockscorrespond to the beginningofacrisisofthe posted, price 493 system, as far as theyare connected to the attempt of producing countries 494 to re-appropriatetheir resources. The result of this attempt was in fact 495 OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

30 Oil Counter-Shock

496 the disruption of the complete vertical integration of the industry 497 established by the majors, and the consequent gradual emergence of a 498 proper market for crude oil. The proliferation of differentpricing 499 systems was in fact asignal of confl ictand inconsistencies. These would 500 be settled onlybythe end of the 1980s, when OPEC countries fi nally 501 adopted spot prices as areferencefor their sales. 502 Letusreturn to the graphofthe secular oilprice trendatFigure1.1. 503 If reported historical seriesofcrude oilpricesare observed, the 504 contrastbetween the fi rst long phaseofposted prices, fromthe 1920s 505 to theend of the1960s,withthe following OPEC administered 506 pricingsystem andthe fi nalemergence of theopen market,isquite 507 outstanding. Even if prices rose slightly in the fi rst two years of the 508 1970s,after the signingofthe Tehran andTripoli agreement,the 509 fi rstrealjumpcan be observed in 1973, when the fi rst oilshock took 510 place. In 1973 OPECbecame thenew administrator of theoil pricing 511 system, whichwould be basedonthe correlation of allthe member , 512 countries offi cial sellingpricestothe postedprice of an offi cial marker , 513 crude, namely SaudiArabia sArabianLight.However, thetaskdid 514 notproveeasytomanage. Negotiations within OPEC to establish 515 thelevel forthe postedprice werediffi cult,due to thedifferent 516 position andinterests of each member. In particular,the marker price, 517 related to ArabianLight,implied two different concepts of sovereignty: 518 that of OPEC, in chargeofits administration, and that of SaudiArabia, 519 since themarker pricewas alsothe priceofits morevaluable national 520 resource. 37 521 In the late 1970s, amassive fl ow of non-OPEC oil supply became 522 available,thus making the task of administering prices even more , 523 diffi cult, above all in presence of an expandingspot market were OPEC s 524 offi cial selling prices were heavily discounted. When such atrend was 525 inverted followingthe Iranian Revolution, awidespread misunderstand-

526 ing of the conditions for market efﬁ ciency turned the false signals coming

, 527 from speculativepanic pricesinanilliquid mark, et into the reference for , 528 decisions about OPEC sadministered prices. The 1979 price increase OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

Price Regimes, Price Series and Price Trends 31

529 heavily contributed to make possible to amortise and expand the huge 530 technologicalinvestments neededtofurther developnon-OPEC 531 production,which fl ooded the spot marketpushing pricesdown and 532 fi nally breaking the OPEC oligopoly. 533 The adoption of an OPEC quota system in the early 1980swas not 534 suffi cient to sustain prices, not least because most of the member 535 countries were cheating, producing more than allowedbythe ceilings, 536 competing to expand their own share and volumes. The refusal of Saudi 537 Arabia to continuetoperform the role of swing producer and its 538 introduction of the net-backdeals in 1985 markedareturn to full 539 production and were the direct causefor the price collapse of 1985– 86, 540 and also for the fi nal emergence of a market pricingsystem for crude oil 541 as the onlyviablealternative. 542 The current oil pricing system has now survived for morethan a

543 quarterofacentury, and apparently all the major players haveno

, 544 intention to rock, the boat .Concerns andarguments are related to price 545 behaviour and to its impact on the macroeconomic level, not to the 546 pricing structure itself, despite its many fl aws.38 As in the case of the 547 previous oil pricing systems, the current one suits the vested interests of 548 the actors involved. 549 Despite of the lack of an administrator other than the international 550 exchange market itself, it is fi nallypossible to highlightanew kind of 551 institutional power regulating the current pricing system.The role of 552 priceratingagencies in the assessmentofprice levels is indeed crucial, 553 as the metrics adopted imply aseries of assumptions that can lead to 554 different results, and suchresults in their turn heavily infl uence market , 555 trends. The agencies reputation of integrity and effi ciency henceplays 556 acritical role in warranting the confi dence of market operators. The 557 growing fi nancialisation of the oil futures marketinthe lastdecades 558 emphasises such arole and makes the consequences of possible scandals

559 or manipulationspotentially disruptive. The decentralisedgovernance of

, , ,

560 markets relies on the quiet, power of indicators ,whose thin description

, 561 becomes the most important tool allowingto gov, ern by numbers . 39 OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

32 Oil Counter-Shock

562 In this context, manipulations becomeeasier and frequent, leavingroom

, 563 for aradical criticism of fun, ny numbers . 40 An eventual regime change 564 may be possible as far as new and oldactors may ﬁ nd it useful to leverage 565 on these potential cracks in the system. 566 567 Notes 568 1. On performativity, see Donald MacKenzie, Fabian Muniesa and Lucia Siu 569 (eds), Do Economists Make Markets? On the Performativity of Economics 570 (Princeton, 2007). On the constitutive effects of quantiﬁ cation, see Theodore Porter, Trust in Numbers: The Pursuit of Objectivity in Science and Public Life 571

(Princeton, 1995).

, , 572 2. Alain Desrosières, Séries, longues et conventions d équivalence , Génèses ix/1 573 (1992), pp. 92– 7. 3. MacKenzie, Muniesa and Siu, Do Economists Make Markets?;Michel Callon, 574 Yuval Millo and Fabian Muniesa (eds), Market Devices (Hoboken, 2007). 575 4. For ageneral introduction to conventionalist economics, see Franc ois , 576 Eymard-Duvernay (ed.), L économie des conventions, méthodes et résultats (Paris, 2006). The main philosophical reference is David Lewis, Convention: 577 APhilosophical Study (Cambridge, MA, 1969). 578 5. Francisco Parra, Oil Politics: AModern History of Petroleum (London, 2010), 579 p. 56.

6. Ibid., p. 46.

580 7. Robert Mabro, The, international oil price regime: origins, rationale and 581 assessment, , Journal of Energy Literature xi/1 (2005), p. 5. 8. Parra, Oil Politics,pp. 62– 3. 582 9. See the case of the consumer price index in the US in Thomas Stapeford, 583 The Cost of Living in America: APolitical History of Economic Statistics

584 (Cambridge, UK, 2009).

, 10. Mabro, The, international oil price regime ,p.6. 585 11. Ian Skeet, OPEC: Twenty-Five Years of Prices and Politics (Cambridge, UK, 586 1988), p. 27. 587 12. Parra, Oil Politics,pp. 130– 6; Fadil Jafar al-Chalabi, OPEC and the International Oil Industry: AChanging Structure (Oxford, 1980), p. 82.

588 13. Parra, Oil Politics,p.158.

, 589 14. Mabro, The, international oil price regime ,p.18. 590 15. The Shah of Iran requested OPEC to set the price of oil at the level of more expensive alternative energy sources: Skeet, OPEC,p.101. 591 16. Bassam Fattouh, An Anatomy of the Crude Oil Pricing System: Working 592 Paper WPM 40 (Oxford, 2011), p. 17. 17. Skeet, OPEC,pp. 135– 6. 593 18. Parra, Oil Politics,pp. 229– 32. 594 OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

Price Regimes, Price Series and Price Trends 33

595 19. The most cited case study in the literature on performativity concerns the emergence of amarket for ﬁ nancial derivatives following the elaboration of a 596

theoretical option pricing model by Fischer Black, Myron Scholes and Robert 597 Merton: Donald MacKenzie and Yuval Millo, Constructing, amarket,

598 performing theory: the historical sociology of a ﬁ nancial derivatives exchange, , American Journal of Sociology cix/1 (2003), pp. 107– 45. However, 599 other scholars have argued that the market for derivatives never worked as 600 the theory prescribed, and that theories are performative only if they become

601 an explicit convention as suggested by Lewis, Convention:see Nicolas Brisset,

, Economics, is not always performative: some limits for performativity , 602 Journal of Economic Methodology xxiii/2 (2016), pp. 160– 84. , 603 20. Leonardo Maugeri, L era del petrolio: mitologia, storia efuturo della più 604 controversa risorsa del mondo (Milano, 2006) [ The Age of Oil (Westport, 2006)], p. 149. 605 21. For adetailed analysis of the events of this period focused on the strategic , 606 confrontation between OPEC and the majors, see Francesco Petrini schapter in this same volume. 607 22. Robert Mabro, Netback Pricing and the Oil Price Collapse of 1986: Working 608 Paper WPM 10 (Oxford, 1987), pp. 46– 52. 609 23. Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (New York, 2012), p. 729. 610 24. Fattouh, An Anatomy of the Crude Oil Pricing System,p.19. 611 25. Parra, Oil Politics,p.321. 612 26. Ibid., p. 210. 27. Ibid., Oil Politics,p.183. 613 28. Ibid., Oil Politics,pp. 219– 20.

614 29. Fattouh, An Anatomy of the Crude Oil Pricing System,pp. 74– 5.

, 615 30. Mabro, The, international oil price regime ,p.8.

31. Parra, Oil Politics,p.305.

, 616 32. Wilfrid Kohl, OPEC, behavior, 1998– 2001 , The Quarterly Review of 617 Economics and Finance xlii/2 (2002), pp. 209– 33. 33. For asurvey of the debate on central bank communication, and its ability to 618

enhance the effectiveness of monetary policy incentives, see Michael Kramer,

619 Hal Brill, Christopher Peck, Jim Cummings and David-Jan Jansen, Central, 620 bank communication and monetary policy: asurvey of theory and evidence, , Journal of Economic Literature xlvi/4 (2008), pp. 910– 45.

621

34. Michael Piore, Stability, and ﬂ exibility in the economy: reason and 622 interpretation in economic behavior, ,Paper presented at the workshop 623 Conventions et Institutions: Approfondissements Theoriques et Contributions au Debat Politique,Paris, La Défense, 11– 12 December 2003.

624

35. One example is the study by Marion Radetzki, Long, run price prospects for

625 aluminium and copper, , Natural Resources Forum vii/1 (1983), pp. 23– 36.

, 626 While assuming that prices converge toward the market incentive, price , Radetzki explains historical price variations by focusing on the different 627 OCS Chapter1— 1/2/2018— NANDHINI.P— 571961— IBTauris

34 Oil Counter-Shock

628 pricing systems adopted in the two metal markets, and on institutional changes. 629

36. Fattouh, An Anatomy of the Crude Oil Pricing System,p.14.

, 630 37. Mabro, The, international oil price regime ,p.28. 631 38. Fattouh, An Anatomy of the Crude Oil Pricing System,p.10. 39. Sally Engle Merry, Kevin E. Davis and Benedict Kingsbury (eds), The Quiet 632

Power of Indicators: Measuring Governance, Corruption, and Rule of Law

633 (Cambridge, UK, 2015); Theodore Porter, Thin, description: surface and 634 depth in science and science studies, ,inR.Kohler and K. Olesko (eds), Clio Meets Science: The Challenge of History,special issue of Osiris 17 (2012),

635 pp. 209– 26.

, 636 40. See Theodore Porter, Funny, numbers , Culture Unbound: Journal of Current 637 Cultural Research iv/4 (2013), pp. 585– 98. 638 639 640 641 642 643 644 645 646 647 648 649 650 651 652 653 654 655 656 657 658 659 660 OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

1 2 3 4 5 6 2 7 8 9 10 TheRoleofthe Dollarand the 11 JustiﬁcatoryDiscourse of Neoliberalism 12 13 14 David E. Spiro 15 16 Introduction 17 18 In November 1985 the price of West Texas Intermediate (WTI) crude oil 19 was$30.81 per barrel, and then the price began to fall. By March1986 the 20 pricewas $12.86 per barrel. Much attention is given to the price shocksof 21 the 1970s, when oil suddenlybecamemore expensive. Not nearly as 22 muchattention has been paid to price drops. 23 Whydid theprice fall?And sincethe US dollar wasboththe 24 denominatorand themeans of exchange in oilmarkets, what role did 25 thedollarplayinthiscounter-shock?InthischapterIsummarise 26 theprice behaviourofoil duringthe counter-shock,and suggest 27 possibleexplanations. Then Ireviewhow thedollarcametobea 28 denominatorand meansofexchangeinoil markets, and Iexamine the 29 roleofthe dollar in thecounter-shock. Iconclude that anypurposive 30 policies to make thedollaradenominatorand meansofexchange 31 hadlittle to do with thecounter-shock. The consequences of therole 32 of thedollar were unintentional.These unintentional effects are 33 typicalofAmerican hegemonyand US policy in general, andtheyhelp OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

36 Oil Counter-Shock

34 us to better understand theworkings of theinternational political 35 economy. 36 Butmoreimportantly,the counter-shockof1986gives us awindowon 37 theevolution of social purposeinthe global politicaleconomy,and on the 38 rise of neoliberalism. It is my argument that by thetimeofthe counter- 39 shock, American offi cialshad gone from usingneoliberalism in orderto 40 justifyunilateraluncooperative policies to actually believinginthe effi cacy 41 of market forces.Marketforcesare rarely acoherent intellectual 42 explanationfor priceswings. So theideologyofneoliberalism meant, in 43 effect, that policymakers justi fi ed whatever happened in termsofmarkets 44 working, even when what happened wasthe result of statepower.

45 Oilmarkets provide awindow on the global political economy,given

, 46 their far-reac, hing social, cultural and economicconsequences ,as 47 William Glenn Gray notes. 1 The political economy of oil is acase study 48 from which scholars can cometoslightly differentconclusions though 49 they agreeonthe evidence.2 This chapter looks at oil prices less in terms 50 of causeand effect, and more as arepresentative picture of the changesin 51 social purpose of neoliberalism. The political economy of oil exposed 52 neoliberalism as ajustiﬁ cation for power and, at times,for chaotic swings 53 in fortune. 54 55 Why did the Price Fall? 56 As Figure 2.1 shows, oilprices fell rapidly in 1986, and in real terms the 57 price dropped to levels not seen since the ﬁ rst oil shock in 1973. After 30

58 years of unchanging prices, largely due to the oligopsony of the seven,

59 sisters, ,oil prices had risen in 1974, and then again after the Iranian 60 revolutionin1979.Inreal dollars (that is, 2015 dollars, with past prices 61 adjusted to reﬂ ect the inﬂ ation in the interim), pricesspiked to almost 62 $120 per barrel after 1979,and then gradually fell to under $70. 63 In nominal terms, the prices peakedat$40, and gradually fell to $30.3 In 64 the fall of 1985 and springof1986, the price collapsed. It fell by 60 per 65 cent in four months. What could the explanation for this drop be? 66 OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

The Role of the Dollar and the Justiﬁcatory Discourse 37

67 68 69 70 71 72 73 74 75 76 77 78 79 Figure2.1 Nominal and real prices of WTI (2015 US$). Source: 80 US Energy Information Agency (EIA) of the Department of Energy, 81 www.eia.gov. 82 First, it is important to remember that spot prices of West Texas 83 Intermediate are onlyindicators of oil prices.4 Most purchasers had long- 84 term contracts and the prices of those contracts were far more stablethan 85 the spot market in Rotterdam. Indeed, the spot marketwas in some ways 86 adistressmarket. Buyers went there to makeupshortfalls. So when 87 there wasasudden surge in demand for oil, the spot marketfaced 88 exponentially higher demand than the overall market, which wassubject 89 to long-term contracts. And conversely, the spot marketfaced an 90 extreme glut when there was no residual demand. Sudden rises and drops 91 in the spot pricedid not necessarily mean that the average price of oil 92 transacted in any given month rose or fell so markedly. 93 Figure 2.2 shows that, if anything, there wasaslightly downward 94 trendinpricesfrom the 1970s to March2003.The regressionlinehas an 95 adjusted Rsquared of only6per cent, which means that it doesnot 96 account for much of the variance in oil prices. But it is suggestive of what 97 can be gleanedbysimply looking at the graph of prices in real dollars. 98 If there was some sort of equilibrium in the 1970s, it was above the 99 artiﬁ cially low price set by major oil corporations before the ﬁ rst oil OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

38 Oil Counter-Shock

100 101 102 103 104 105 106 107 108 109 110 111 112 113 Figure 2.2 Real price of WTI (2015 US$): OLS regression. Source: 114 US Energy Information Agency(EIA) of the Department of Energy, 115 www.eia.gov. 116 shock. That imaginary equilibrium price was also belowthe prices 117 reached after the Iranian revolution. And though the price reached in 118 1986 wasperhapslower than ageneral equilibrium, it wasmorere fl ective 119 of prices for the following 17 years.5 120 Supply and demand are supposedtodetermineprices in free 121 markets, and they do explain the very rough contoursofoil price 122 movements. Oil prices had not risen at all before 1973,while demand was 123 increasing with global economicgrowth and industrialisation. The 124 demand for fossil fuels, though increasing, did not change abruptly; and 125 neither did supply, so it is unlikely that they explain specifi cprice 126 movements. We should expect that oil pricesbehigher than they were 127 before 1973.The prices toward 1980,however, refl ect panic in world 128 markets, as well as the residual nature of spot market pricing. 129 There was no change in supply and demand to explain such large and 130 abrupt price movements, especially in 1986, but there was achange in the 131 cartel behaviour of OPEC. In order to be effective, acartel must limit 132 production. An example of asuccessful commodity cartel is De Beers, OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

The Role of the Dollar and the Justiﬁcatory Discourse 39

133 which limits the global supply of diamonds (no matter how manyraw 134 diamonds areminedeach year), and keeps prices high. OPEC created the 135 perception of cartel behaviour when several of itsArab members 136 embargoed the UnitedStates and much of Western Europe in 1973– 4. 137 Besides, OPEC nations were able to break the stronghold of the 138 seven major oil companies, and those nations renegotiated the royalties 139 theyreceived. 6 140 To maintain acartel, each member nation must restrict its 141 production.Revenuemaximisers are tempted to cheat on production 142 quotas. Whenevery member save for one cheaterrestricts production, 143 the price stays high and the cheating memberenjoysincreased exports at 144 higher prices. But what is rational for the cheaterisrational for everyone. 145 And when everyonecheats, the pricefalls and none beneﬁ t. The choice 146 between restricting production and raising it formsthe payoff structure

, , 147 of a prison, ers dilemma ,inwhich the Nash Equilibrium of raising 148 production is sub-Pareto optimal. 149 Hegemonic StabilityTheory is acommon explanation for how the , 150 players in aprisoners dilemma achievecooperation (or in this case 151 restriction of production). Saudi Arabia served as the dominant leaderin 152 the OPEC cartel. It is characterised as aswing producer, who restricts 153 production when others over-produce, and whoincreases production 154 when there is more scarcity than moderately high pricesjustify.7 155 In thebeginningofthe 1980s, both Iranianand Iraqioil production 156 decreasedwhile they fought awar with each other. Butworld consumption 157 also decreasedgradually,respondingtothe pricehikein1979.Energy 158 conservation is notanimmediate responsetohighoil prices – it takestime 159 to insulate homes, buysmaller automobiles, andinstall more efﬁ cient 160 energy devices. Once that investment is made,the conservation continues 161 even if theprice of oildeclinesagain.The decrease in demand forcrude oil 162 wasgreater than thedecreaseinproductionbyIranand Iraq.And that 163 decreaseddemandwas nottemporary. 164 Saudi Arabia lowered its production by 75 per cent between1981 and 165 1985, and evensothe price of oil fell by 25 per cent. By the end of 1985 OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

40 Oil Counter-Shock

166 Saudi Arabia made it clear that it was no longer willing to serveasthe 167 swing producer. It began to ramp up production in 1986, and if therewas 168 one event that is clearly linked to the counter-shock of that year, it is 169 when Saudi Arabia abandoned its role as swing producer.8

170 The other event that may partly explain the severity of the price

, 171 drop in 1986 is the so-called Plaza, Accord to devaluethe US dollar. 172 Against major currencies, the dollar had nearly doubled in value between , 173 1980 and 1986. The fi nance offi cials of America strading partners felt 174 that the dollar was overvalued. The US wasrunningaverylarge trade 175 defi cit – large even by historical standards. Othermembers of the G7 felt 176 that adepreciation of the dollar would help to bring the US trade account 177 into balance.9 178 This mayhavere fl ectedamisunderstanding of changesinthe nature , 179 of thebalance of payments afterthe endofthe dollar sconvertibilityinto 180 gold.Traditionally,the tradeaccount is thoughttobebalancedbycapital 181 infl owsand out fl ows. Butsince theend of BrettonWoods,the US capital 182 accountmay be drivingthe tradeaccount.The United States specialisesin 183 exporting fi nancialinstruments, andespeciallygovernmentdebttofund

184 itsde ﬁ cits.The global demand forAmerican ﬁ nancialinstruments maybe

, 185 theelement of tr, ade that determines thede fi citingoods andservices. 186 Though therewere some academicianswho held this view, it was not 187 shared by the fi nanceof fi cials of the G7. They urged the United States to 188 join in market intervention to bring down the valueofthe dollar. At the , 189 time, PresidentRonald Reagan sadministration held alaissezfaire 190 ideology, and objected to market intervention. But theyagreedto 191 cooperate, and this agreement wascodifi ed in the PlazaAccord of 192 22 September1985. 193 In early 1985,the US dollar had peakedat¥263 and DM3.5. After the 194 negotiationsand the Plazameeting,Japan and West Germany lowered 195 their discount rates, G7 members announced their intention to lower 196 the value of the dollar, and they began ostentatious intervention in 197 currency markets. The currencies that later becamethe ECU appreciated 198 by 43 per cent against the dollar in the next year. The dollar fell by more OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

The Role of the Dollar and the Justiﬁcatory Discourse 41

199 than 50 per cent vis-à-vis the Deutschemark and Yen. Oilwas priced in 200 dollars.Sothe less valuable dollar exacerbated the fall in the nominal 201 priceofoil as measured in the currencies of other major economies. The 202 pricedrop wassevere in dollars, but it was even more severe in European 203 and Japanese currencies. 204 Some of the pricedrop might also be attributable to ageneral 205 recovery of confi dence in fi at currency. The price of oil, after all, is the 206 relative pricebetweentwo commodities: oiland thespecialised 207 commodity we know as money. Increased confi dence in money is 208 refl ected by lower prices.Asothers in this volumepoint out, the lower 209 buying power of the dollar emphasised the loss of revenue by oil 210 producers. This made it more likely the producers would fail to limit 211 output, and withoutlimits on output OPEC could not function as acartel 212 that maintained set prices. 213 A fi nal explanationisthe general irrationality of markets, and it is

214 this explanation that Icreditthe most. Efﬁ cient marketproponents

, 215 believe that prices take a ra, ndom walk as they incorporate constantly 216 changing information. But this random walk does not explain the severe

217 ﬂ uctuations in the price of oil. It is more likely that mass psychology,

, 218 or the popular, delusions of crowds ,iswhat has caused markets to 219 constantly overshoot the equilibria that would be predicted by supply 220 and demand, and by changes in information driving expectationsofthe 221 future.10 Oil has had verysteep rises and drops. In 1973 and 1979 the 222 pricerosevery rapidly. In 1986 it fell sharply. In 1990 it dramatically rose 223 and fell again. It did so again in 2008. There may be underlying forces 224 that explain the price changes, but these underlying forces do not explain 225 the severity of the ﬂ uctuations. It would be amistake to impose 226 intellectual explanations on this situation of randomness and anarchy. 227 In this chapter Idifferentiate betweenmarket forces and market- 228 based explanation,and between market actors and authoritative actors. 229 Although Iargue that market-based explanations (supplyand demand, 230 income maximising behaviour, etc) do not explain price movements, 231 when privateactors are allowed to set pricesIcall it amarket outcome. OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

42 Oil Counter-Shock

232 Of course,all market outcomesare heavily infl uenced by state actions 233 and by the political security of laws and property rights. And the fact that 234 we study international economicoutcomes is aproduct of the nation- 235 state system, and the possibility of political barriers to economic fl ows 236 across borders. 237 238 The Role of the Dollar 239 The dollar is adenominator of exchangefor oil. Oil is pricedindollars, 240 though any currency can be to conduct exchange. Until the late 1990s, 241 the benchmark for oil prices was West Texas Intermediate crude. More 242 recently, oil from the NorthSea (Brent) has been tradedasabenchmark, 243 in part because it is morecommon on the spot market in Rotterdam, and 244 in part because of awidening price differential between WTI and Brent, 245 and in part because of the decliningimportance of WTI deposits (many 246 of which are actually in Oklahoma) in the supply of world petroleum. 247 WTI was set as astandard in 1928 in the Achnacarry Agreement, a 248 collusiveproduction agreement made in secretbythe heads of Standard 249 Oil of New Jersey (Exxon), Shell, and Anglo-Persian (later BP). Later 250 modifi cations referred to prices paid to host countries for crude, and that 251 price agreement established WTI as abenchmark (with other crudes to 252 be pricedatWTI plus the imputedcost of transportation from Texas). 253 WTI was pricedindollars, so the benchmarkfor crude becameadollar 254 price. 255 Under the Bretton Woods system, almost all commodities were 256 priced in dollars, and that included oil. By the 1950s fi ve of the seven 257 sisters were controlled by American shareholders. Oil was mostly priced 258 in dollars because of the hegemonicroleofthe UnitedStates in the 259 international monetary system. And it wasalso pricedindollars because 260 international markets were controlled by asmall number of corporations 261 owned by Americans.11 262 The closing of the gold window in 1971, and the loss of control over 263 the oil market by the seven sisters in 1973, led to the possibility that oil 264 OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

The Role of the Dollar and the Justiﬁcatory Discourse 43

265 could be priced in some other currency. In 1973, the leader of Libya 266 nationalisedforeign oil company assets, and refused to accept dollars as 267 payment for oil.12 His efforts to defy the oligopsony of the seven sisters 268 met with success, but no matter what currency Libya accepted as 269 payment, its oil was still priced in dollars. 270 After the fi rst oil shockin1973,policymakers in the United States 271 governmentworried about how the capital surplus held by oil exporters 272 would be recycled to defi cit countries. The trade surplus of oil exporters 273 wasstructural and expected to endure. Many, such as Saudi Arabia, 274 could not import enough to balance the tradeaccount. And becauseoil is 275 an exhaustible resource, they did not want to balance the trade account. 276 Theywanted to save for future investment. 277 In aworld with effi cient markets, it would not matter what currency 278 oil is pricedin, or what currency is used to purchase it. But of course, in 279 this hypothetical world, the existence of national economies with

280 national currencies is arather arbitraryconcession to reality. (It is

, 281 arbitrary to assume the in, effi ciencies of national economies, while 282 holding to the effi ciencyofmarket exchangebetween those economies.) 283 Though oil might be pricedindollars, it could just as well be pricedin 284 Japanese Yen and for each currencythe price could be calculated on a 285 moment-by-moment basis for exchange rates. The denominator of 286 exchange, which means the currency usedinaparticulartransaction, 287 would be of equal unimportance because it could be changed into 288 another currency rapidly in liquid foreign exchangemarkets. Imagine a 289 transaction between Bolivia and Saudi Arabia. Bolivia would use foreign 290 reserves to buy oil using US dollars,which Saudi Arabia couldthen 291 invest. But the Saudis need not investindollar assets. They can change 292 the dollars for any other currency used to transact investments. 293 Alternatively, Bolivians might use Sucres to purchase oil (if the Saudis 294 accepted them) and then the Saudis would need to exchangethe Sucres 295 for dollars or whatever currency they wished to use for investments. 296 From this standpoint of effi cient currency markets, it does not make a 297 difference what currency the transaction uses, except that when dollars OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

44 Oil Counter-Shock

298 are used in oil markets the costs of foreign exchange transactions are 299 shifted to the buyer, and when investment assets are in other than 300 dollars, the cost of foreign exchange transactions are the responsibility of 301 the oil surplusstate that is investing. 302 Butinthe real world,the primacyofthe dollar was important to US 303 policymakers,sodollar pricingand dollarsasthe meansofexchange 304 wasalso important. Someofthisconcern wasrooted in ageneraldesire 305 to maintain dollar hegemonyafter the closingofthe gold window and 306 theshift to a fl oating rate regime.And much of theconcern stemmed 307 fromworriesabouthow recyclingwould be accomplished, andto 308 whose benefi t. 309 When oil waspriced in dollars,and when the OPEC surplus was 310 invested in dollar assets (which the US governmentsought quite 311 actively), the US economyenjoyed adouble loan. 13 The fi rst part of the 312 loan was for the purchase of oil. The United Stateswas able to print 313 dollars to buy oil, and so long as the sellers of oil did not trade those 314 dollars for goodsand services, the oil was for the time being withoutcost. 315 The second part of the loan wasfrom the rest of the world, which needed 316 dollars to buy oil (and could not print dollars).Those countries sold 317 goods and services to the United States in return for pieces of green paper 318 with picturesofGeorge Washington and Alexander Hamilton smirking. 319 In practice, of course,the US Treasury didnot simplyprint dollars. 320 Thefederalgovernmentran abudget defi cit(especially after 1980,with , 321 theintroduction of Ronald Reagan schanges to thetax code). It sold 322 Treasuryobligationsfor dollars, whichremoved them fromthe money 323 supply.And that meantthatthe printed dollars were boundupinthe 324 Treasuryobligationsheld by foreigngovernments,especially OPEC 325 governments. 326 Many economies have attempted to printcurrencies to buygoods, 327 andithas often resulted in hyperin fl ation. Usingseigniorageinthe 328 production of moneydates back to at least thefourthcentury, 329 when Rome increased the bronze contentand decreased the silver in 330 coinage. It was aprominent feature of thetwentiethcentury,with OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

The Role of the Dollar and the Justiﬁcatory Discourse 45

331 hyperin fl ation in CentralEuropeand theWeimar Republicbefore 332 WorldWar II,and with thecontinual changesinBrazilian and 333 Argentine national currencies. 334 TheUnitedStateshas been theonlygovernmentand national 335 economythathas been able to runalong-termbalance of payments 336 defi cit, whichenabled it to printcurrencywithout theimmediate 337 consequenceofhyperinfl ation. It hasrun abalance of payments defi cit 338 sincethe founding of theBretton Woodssystem. Some of this defi cit

339 funded worldeconomicgrowthbyproviding dollarsfor reserveassets.14

, 340 At timesithas seemed an ex, orbitant privilege ,asFrenchministerValéry , 341 GiscarddEstaingcalleditwhenthe US ranade fi cittopay forattempting 342 to resolvethe colonial mess that theFrench hadmadeinVietnam.Itwas 343 certainlyaprivilegefor theUnitedStatestorun defi cits in this manner 344 during the1980s, andalsofor theinvasions of Iraq andAfghanistan 345 during theadministrationofGeorgeW.Bushinthe early2000s. 346 In the late 1970s, the onus of funding US defi cits fell to oil surplus 347 states,and there was talk of changing oil pricing and oil transactionsto 348 another currency. In June 1975, according to congressional testimony, 349 OPEC reached aconsensus to peg the price of oil to IMF SDRs (Special 350 Drawing Rights), which were abasket of widely traded currencies. As the 351 dollar depreciated throughout 1975 – 9and the nominal priceofoil rose, 352 it would havebeen in the interestofmostoil exporters to peg the priceof 353 their exports to abasket rather than the dollar. 354 Shortly after that agreement in 1975 the dollar began to rise again, 355 and the decision seems to havebeen forgotten. OPEC has never made 356 public these discussions, but they were known to the staff of the US

357 Treasury. From internal Treasury memos dated October 1978, it appears

, 358 that OPEC considered three options. Onewas called a Geneva, II basket ,

359 which wascomposed of the G-10(Bank of International Settlements

360 members) currenciesplus Switzerland and Austria. A strong, currency 361 basket, was the secondoption – oil would be priced in whatever currency 362 wasappreciating in value the most. And SDRs was the third option,and 363 the one taken most seriously.15 OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

46 Oil Counter-Shock

364 Certainly the price of oil would havebeen more stable if it were 365 priced in SDRs, as the price drop in 1986 demonstrates. In the ten 366 months leading to US– Saudi discussions in October 1978, the relative 367 purchasingpower of OPEC dollars had fallen by 40 per cent. OPEC had 368 involuntarily lowered the effective price of oil by four tenths. Its dollar 369 investments were also hurt. The US Treasuryestimated that Saudi Arabia 370 would have been better off using acurrency basket for almostall of the 371 time since the fi rst oil shock in 1973.16 372 By 1978,Saudi Arabia had agreat majority of the dollar reserves held 373 by OPEC,and it stood to lose the most if international confi dence in the 374 dollar as areserve currency was hurt. And that confi dence would have 375 been hurtbyashift to basket-based oil prices. Dollarsconstituted 90 per 376 cent of Saudi governmentrevenues by the end of the 1970s, and 83 per 377 cent of reserves were in dollars. So the choice was between stabilising the 378 value of current revenues, or stabilising the worth of past revenues 379 (which were being savedindollars). 17 380 Even if Saudi Arabia, and other oil exporters, did not shift pricing 381 and transactions away from dollars,they could diversify their dollar 382 holdings. SAMA(Saudi Arabian Monetary Agency) began afairly 383 aggressiveshift to Deutschemarks and Yen in 1978. The fi nance minister 384 of Kuwait visited Washington and renewedsuggestions of moving to a 385 currency basket (accompanied by aprice hike).18 386 At the time, Michael Blumenthal was Secretary of the Treasury. 387 He went to Saudi Arabia with several arguments for maintaining dollar 388 pricing. His fi rst wasthat the dollar wasgoing to appreciate. 19 This was 389 not an offi cial stance to the rest of the world, as the government was not 390 intervening in currency markets to change the valueofthe dollar. It did 391 indeed appreciate over the next few years, partially in response to the 392 unanticipated rise in interest rates when Paul Volckerbegan to target the 393 money supply at the end of the 1970s. 394 Of the most interest to Saudi Arabia, though not necessarily to the 395 rest of OPEC,was an increasedrole in the IMF.Although it was 396 supposedtobethe international institution responsible for fi nancing OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

The Role of the Dollar and the Justiﬁcatory Discourse 47

397 balance of payments adjustment, and therefore it should have been the 398 primary focusofpetrodollarrecycling, the IMF played afairly marginal 399 role in recycling. It did put together aSupplementary FinancingFacility 400 (known as the Witteveen facility) in 1978,and that was funded by Saudi 401 contributions. 402 At issue in increasing Saudi quotas in the IMF was decliningUS , 403 votingpower. Anation svoting share in the IMF is determined by its 404 quota. At the founding of the IMF, the United Stateshad a30per cent 405 quota. It fell to 25 per cent in 1959, andby1978 it was less than 20 per 406 cent. This allowed the United Statesanautomaticveto on votesthat

407 would fundamentally change the balanceofpowerinthat international

, 408 institution. A high, majority of 80 per cent was required while the 409 UnitedStateshad 25 percent of the votes,and that requirement was 410 increased to 85 per cent when the US share dropped again in 1978. 411 Untilthe high majority waschanged,the United States wasreluctant to 412 seeits voting sharefall, andthatmeant it didnot want to allowincreased 413 contributionsfromSaudi Arabia.The Saudis,onthe otherhandwere 414 willingtokeepoil priced in dollars(rather than SDRs), if it wasallowed to 415 appointadirector on along-term basis. SaudiArabiawas permittedto 416 appointadirector foratermoftwo yearsin1978, basedonits lending 417 to theWitteveen facility,but to appointthe directorfor alongerterm, the 418 United States hadtoallow SaudiArabiaanincreaseinvotingshares.

419 Acompromise between the United States and Saudi Arabia was

, 420 linked to the role of the dollar. In what was called the Seven, th Review , 421 of quotas, the United Statesagreed that Saudi Arabia squota would 422 increase by 350 per cent, so long as they dropped the idea of pegging oil 423 to SDRs and kept the prices in dollars. Saudi Arabia becamethe sixth 424 largest memberofthe IMF. Mainland China was alsogiven amore 425 signi ﬁ cant position. The United States, though its share of the global 426 economy had diminished, wasallocated an increased quota so that its 427 vote wasjust under20per cent. It maintained its veto power.20 428 Theintent of US policymakers wastomaintainthe generalroleof 429 thedollar. It is most likely that their efforts have continued sincethe OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

48 Oil Counter-Shock

430 late 1970s, butnoresearcher hasfound evidence to proveit. 431 Although thepress reports periodic threats to decouple oilpricesfrom 432 thedollar (byIran, by Libya, andbySaddamHussein in Iraq),there 433 is no research showing that theUnited States hasbeen active in 434 preventing those attempts.21

435 Storiesabout the role of the dollar have expanded overtime. For 436 example,Marin Katusawrites that Richard Nixon as, ked King Faisal of 437 Saudi Arabia to accept only US dollars as payment for oiland to invest 438 any excess proﬁ ts in US Treasury bonds, notes, and bills. In exchange,

439 Nixon pledgedtoprotect Saudi Arabian oil ﬁ elds from the Soviet Union 440 and other interestednations, such as Iran and Iraq., 22 His sole source 441 seems to be my work, though Imade much more moderate claims.Most

442 work on the subject is deductive. One journalist noted that the Saudis 443 enjoyed the capacity to, affect US interest rates and the strength of the

444 dollar on foreign exchangemarkets in the unlikely event they should 445 choose to do so, . 23 It was clear that the United Stateswas vulnerable to 446 hostile Saudi policy, as it is vulnerable to any government with which it 447 has close economicand fi nancial relations. And just as observers posit 448 very general motivations for US policy,the policymakersthemselves 449 were likely driven by averygeneral desiretomaintain the dollar as a 450 powerful international currency. 451 452 The Role of the Dollar and the Justificatory 453 Discourse of Neoliberalism 454 455 The denomination of oil priceswas not much of afactor in explaining 456 the counter-shock, but it representedanimportant symbol in the 24 457 exercise of American power. At the start of the fi rst oil shock in the 458 1970s, policymakers in industrialised countries had agreed not to 459 compete for Arab petrodollars. Insuring that oil was priced in dollars was 460 part of ageneral US strategytodojust that. The United States cut secret 461 deals with Saudi Arabia to sell it Treasuryobligations and to attract the , 25 462 lion sshare of the Saudi surplus. OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

The Role of the Dollar and the Justiﬁcatory Discourse 49

463 In the1970s the policy response that hadpolitical legitimacy 464 wasmultilateralcooperation,not unilateral competitionfor capital.26 465 Thesocialpurpose of theglobalpolitical economywas still

466 characterised by what politicalscientistJohnRuggiehas called

, 467 ,embeddedliberalism . 27 Policymakers didnot trustthe unfettered 468 workingofmarketforces.Of fi cialsofthe US governmentand the 469 Federal Reserve system didnot thinkthatcapital marketscould handle 470 petrodollar recycling.28 471 But in an attempt to calm markets, bankers andof fi cials at Treasury 472 and the Fed made public statements saying that markets were working. 473 And offi cials such as TreasurySecretary William Simon attempted to

474 justify unilateral policies by saying that the US governmentwas letting

475 markets work, while ,government-to-government channels have

476 increasingly been opened .Hevowed, however, that the US, Government 477 offers no special subsidiesorinducements to attract capital, ,which was 478 quite simply afalsehood.29 Thus, apart of the reason for the emergence

479 of neoliberalism was as justiﬁ catory discourse. It meshed well with the

, 480 emerging Washin, gton Consensus of the IMF,World Bank, and US 481 Treasury in their structural adjustment conditionalities in the developing 482 world.30 But at least in the case of oil and petrodollarmarkets, US 483 policymakers were appealing to shared norms(that market forces were 484 legitimate) more than describingwhat they thought was actually 485 happening (that markets were recycling petrodollars). 31 486 By the1980s, underthe administration of Ronald Reagan, 487 Washington had completedits turn to neoliberalism and free market 488 ideology. But more than adecade after the institution of ﬂ oating 489 exchange rates, policymakers had avery poor conceptionofwhat it 490 meant for the dollar to be the bulwark of global capitalism,orhow the 491 role of the dollar could be used in the pursuit of American interests. 492 Outcomes that were left to marketactors generallyfavoured the United 493 States, and there were few pressuresonWashingtontointervene or 494 evenregulate markets (the Plaza Accord was an important exception). 495 Policymakers insisted on the free functioning of markets, even when it OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

50 Oil Counter-Shock

496 violated previous understandings of legitimate hegemony and the 497 appropriate boundariesfor authoritative allocation. In this sense,the 498 imposition of free markets on the rest of the world was political and 499 should be viewed as apoweroutcome. 500 Thecounter-shockof1986 shows us that after adecade of 501 neoliberalismasjustiﬁ catory discourse, policymakers beganto 502 believeinthe free functioning of markets. Many in theUSgovernment 503 wanted to see theprice of oildecline, butinaforeshadowing of opinion 504 regardingthe 2016 drop in oil prices, some thought that prices 505 wereactually too low. Whilethe drop in oilpriceswas good forall 506 energy consumingeconomies, it hurt oilproducingstates in the 507 UnitedStates, such as Texas. That wasthe home of then Vice President 508 GeorgeH.W.Bush. He was preparingtorun forPresidentin1986 509 (the electionwas in November1988), anddepended upon oilwealth in

510 Texasfor support. In April1986 he visitedSaudi Arabia,and expressed

, 511 concern aboutlow oil prices. Cheapoil was a ,two-edgedsword ,hetold

512 reporters, and he consideredthe effects of theprice collapseon

513 domesticproducers to be ,athreattonationalsecurity .Bushsaid 514 publicly that ,We recognise that, as we talk aboutnational security , 515 interests,[alow price] comesinconﬂ ictatsome point – andIdon t 516 knowwhere that is – with thetotally free-marketconceptthatwe

517 basically favor [...] Ifeel that, andIknow thePresident of theUnited 518 States feelsthat., 32 519 President Reagan clariﬁ ed that lower prices would hurt national

520 security by encouraging further US dependence on foreign oil, but 521 confusingly he also said that his Vice President had been, saying pretty ,

522 much what I ve just been trying to say here now – that the free market is

523 the one, the answer to this, . 33 Bush in aradio interview suggested that

, 524 prices need to rise to the point where mar, kets could work . 34 525 Noneofthissuggests avery nuancedorsophisticatedunder- 526 standingofhow markets work,orofthe implications of lettingmarkets 527 work freely. Indeed,the comments smackofwanting certain outcomes 528 while at thesame time justifyingany action taken to achievethose OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

The Role of the Dollar and the Justiﬁcatory Discourse 51

529 outcomes as letting marketswork. Economicanalyst PhilipVerleger

, 530 called theprice drop ,a$400 billiontax cutfor thefree world . 35

531 CommentatorCharles Krauthammercalled Bush sdesire to stabilise

, 532 prices ,so absurd and perverse that it borders on theunbelievable . 36 533 Apartfrom theeffects of oil prices on thedomesticeconomy,this 534 period is characterised by fundamentalmisunderstandings of howthe 535 dollar functioned andhow budget andtrade deﬁ cits werefunded. 536 If marketswere to work freely, thedollarwould remainstrong.Its value 537 was determined by exports of Treasury obligations, notbyimports of 538 oil. Andthe free market foroil would nothavebeenbasedoncollusion 539 to restrictproduction by OPEC, or hegemonic leadership by Saudi 540 Arabia as aswing producer.

541 This unenlightened view of markets, the imposition of markets as a

, 542 poweroutcome, and state intervention to make, markets work ,are the 543 cornerstones of neoliberalism in practice.The counter-shock of 1986 was 544 not caused directly or intentionally by US policy, but the US reaction to it 545 wasemblematic of the workingofneoliberalism as an ideology. And 546 more importantly, the shock was not caused by economicfundamentals 547 or the market forcesofsupply and demand resultinginaprice at which 548 oil was neither over- nor under-supplied. Aprice decline in 1986 can be 549 explained. Aprice collapse is simply the irrational over-reaction that is 550 typical of free markets. 551 In the 1970s to mid-1980s, government ofﬁ cials in developed nations 552 agreed on the legitimacy of policy coordination,and intervention in 553 markets. Yet economic outcomessuch as oil priceswere left in large part 554 to private actors. Marketswere free, so long as theyproducedoutcomes 555 favourable to the US government.Astudy of the policy pronouncements 556 by US government ofﬁ cials shows that when they sought to justify

557 behaviour that might have been inconsistent with the legitimate goals of

558 policy coordination,they resortedtoneoliberal language of letting, 559 markets work, . 560 To impose intellectual constructsofexplanation,other than mass 561 psychology and economicculture, is itself aform of political action that OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

52 Oil Counter-Shock

562 is apart and parcel of neoliberal ideology. As T.S. Eliot once wrote, The, 563 worlds revolve like ancient women /Gathering fuel in vacant lots., 564 Politicians justifythose movementsasletting market forces work. 565 Objective observersshould recognise the forces of irrationality,anarchy, 566 and politicallymotivated self-justiﬁ cation. 567 568 Notes

569

,, , ,

1. William Glenn Gray, Learning, to Recycle :Petrodollars and the West, 570 1973– 5 , ,inE.Bini, G. Garavini and F. Romero (eds), Oil Shock: The 1973 571 Crisis and its Economic Legacy (London, 2016), chapter 7, p. 172. 2. Duccio Basosipointsspeciﬁ cally to varying viewsofimperialand

572

expansionist policies in his excellent work Oil,, Dollars and Power. 573 Petrodollars Revisited, ,paper for the conference Oil Imperialism,Sorbonne 574 University, Paris, 4 – 5November 2016. 3. Data for WTI prices (at Cushing, Oklahoma) are collected by the US Energy 575 Information Agency (EIA) of the Department of Energy, www.eia.gov. Real 576 prices are adjusted for infl ation using the headline Consumer Price Index 577 (CPI) provided by the US Bureau of Labor Statistics. Price histories since 1986 are available for download. EIA data for previous years were 578 downloaded from www.macrotrends.net. 579 4. West Texas Intermediate is used here for price histories because data for it is 580 collected by the US Department of Energy. It is the benchmark traded in fi nancial markets in New York. London markets trade Brent, which is a 581 similar crude. Rotterdam, which is areference point for the physical delivery 582 of spot oil, is amarket for all grades of crude. Since the early 1990s Brent is the dominant reference price, and at the time of the counter-shock in 1986 583 WTI was the benchmark traded in Rotterdam. 584 5. Though not the topic of this study, it is interesting to note that the trend in 585 oil prices reversed in March 2003, when the United States invaded Iraq. From that point on, oil prices trended upward, refl ecting the instability 586 created by the war. Some justifi ed the invasion from the standpoint of 587 securing the supply of oil. But it is clear that the invasion had the unintended 588 (but foreseeable) consequence of doing just the opposite. 6. Nearly all basic texts on oil markets explain cartel behaviour. For an 589 example of aclassic work, see Peter F. Cowhey, The Problems of Plenty:

590 Energy Policy and International Politics (Berkeley, 1985). On the diamond

591 cartel, see Debora L. Spar, Markets:, Continuity and Change in the International Diamond Market, , Journal of Economic Perspectives xx/3

592 (2006), pp. 195– 208. 593 7. Theodore Moran, ,Managing an Oligopoly of Would-Be Sovereigns: The Dynamics of Joint Control and Self-Control in the International Oil 594 OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

The Role of the Dollar and the Justiﬁcatory Discourse 53 595 Industry Past, Present, and Future, , International Organization xvi/4 (1987),

pp. 575– 607.

596

, 8. James D. Hamilton, Historical, Oil Shocks ,inR.E. Parker and R.M. Whaples 597 (eds), Handbook of Major Events in Economic History (New York, 2013), 598 pp. 239– 65. 9. Yoichi Funabashi, Managing the Dollar: From the Plaza to the Louvre 599 (Washington, DC, 1989). 600 10. Iamreferring to the classic nineteenth-century text Charles Mackay, 601 Memoirs of Extraordinary PopularDelusions (London, 1841), which ﬁ nancier Bernard Baruch had reprinted just before the market crash of 1929. 602 11. When Anglo-Persian ﬁ rst explored for oil to supply the British navy with 603 fuel, oil was priced in pounds sterling. By 1974 all oil was priced in dollars. 604 See Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New

York, 1991).

605 12. David Ottaway, Saudi, Threat to Cut Oil Flow Million Barrels Daily 606 Reported, , Los Angeles Times,5September 1973. 13. The active efforts of the US to attract OPEC investments is aprimary subject 607 in my past work: see David E. Spiro, The Hidden Hand of American 608 Hegemony: Petrodollar Recycling and International Markets (Ithaca, 1999). 609 14. This is the basic thesis of Benjamin J. Cohen, Organizing the Worlds Money: The Political Economy of International Monetary Relations (New York, 610 1977); and is discussed in the excellent work of Robert Trifﬁ n, Gold and the 611 Dollar Crisis: The Future of Convertibility (New Haven, 1961) and Barry 612 Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (New York, 2010). 613 15. This memo has never been published, but Isummarise both it and published 614 congressional testimony in Spiro, Hidden Hand of American Hegemony,

615 p. 122.

16. US Treasury Department, Movements, in the Relative Purchasing Power of 616 OPEC Dollar Denominated Assets, ,mimeo, 23 October 1978. 617 17. Spiro, Hidden Hand of American Hegemony,pp. 122– 3. 18. Ibid., p. 123. 618 19. Ibid., p. 124. 619 20. This history is based largely on interviews with IMF ofﬁ cials Iconducted 620 while researching The Hidden Hand.See pp. 103– 5. 21. The work Idid to show the politics of maintaining the role of the dollar in the 621 1970s involved many months of interviews in four different continents. Iwas 622 able to examine boxes of documents for the US Treasury because they had 623 been supplied to acongressional subcommittee, which then lent the documents to me. Perhaps no other researcher has devoted the time and

624 effort to ﬁ nd similar stories from more recent decades.

, 625 22. Marin Katusa, Tehran, Pushes to Ditch the US Dollar , Casey Daily Dispatch 626 online, 24 January 2012. Available at http://www.caseyresearch.com/articles/ demise-petrodollar (accessed 3February 2017). Another study that relies on 627 OCS Chapter2— 1/2/2018— NANDHINI.P— 571962— IBTauris

54 Oil Counter-Shock

628 my work, but exaggerates what actually happened, is Vivek Kaul, Easy Money: Evolution of the Global Financial System to the Great Bubble Burst 629

(Los Angeles, 2014).

,, , , , 630 23. Jim Hoagland and J.P. Smith, , Coincidence of Objectives Ties Saudis, US , 631 Washington Post,20December 1977, quoted in Andrew Scott Cooper, The Oil Kings (New York, 2011), kindle edition locations 11902– 11903.

632

24. For an excellent elaboration, see Basosi, Oil,, Dollars and Power. Petrodollars 633 Revisited, .

634 25. This is thecentral argument of my work Hidden Hand of American Hegemony.

,,, , , 26. Gray, Learning, to Recycle ,describes the Witteveen Facility at the IMF, the

635 European Community Loan Program, asolidarity fund in the OECD, and

636 south– south recycling. He writes in afootnote that my arguments, do not 637 hold up well in light of newly available archival evidence, ,but his excellent archival research seems to support my views without exception. These 638 recycling schemes represented the legitimate multilateral response, and it 639 was against the backdrop of American agreement to these schemes that the secret unilateral competition for capital took place.

640

27. John Gerard Ruggie, International, Regimes, Transactions, and Change: 641 Embedded Liberalism in the Postwar Economic Order, , International 642 Organization xxx/2 (1982), pp. 379– 415. 28. Spiro, Hidden Hand of American Hegemony,pp. 32– 7. 643 29. Statement of Treasury Secretary Simon before the Boards of Governors of 644 theInternational Monetary Fund andthe InternationalBankfor 645 Reconstruction and Development, Washington, DC, 1October 1974, reprinted in US Department of State, Bulletin lxxi/1844 (1974), p. 576. 646 30. Mark Blyth, Austerity: The History of aDangerous Idea (New York, 2013). 647 Blyth gives arich and detailed history of the rise of neoliberalism, but the 648 justiﬁ cations of policymakers regarding recycling are not part of his thesis. 31. Perhaps because of this discourse, many economic histories have claimed 649 that banks and other private markets did indeed recycle petrodollars. The 650 evidence suggests otherwise. See, for example, Carlo Edoardo Altamura, European Banks and the Rise of International Finance: The Post-Bretton 651 Woods Era (London, 2016), chapter 3.

652 32. Bush scomments were reported widely in US newspapers. One was Timothy

, 653 J. McNulty, Bush, Sees Oil Glut Undermining US , Chicago Tribune,7April

1986.

654 , 33. Leonard Silk, Economic, Scene; Reagan, Bush And Oil Prices , New York 655 Times,11April 1986. , 656 34. See Victor McFarland schapter in this volume. 35.USCongress, JointEconomicCommittee, Subcommittee on Trade, 657 Productivity, and Economic Growth, The Economic Impact of the Oil Price 658 Collapse (Washington, DC, 1986).

659 36. Charles Krauthammer, He, sDoing What? Bush Is Trying To Restore High Oil Prices, , Washington Post,8April 1986. 660 OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

1 2 3 4 5 6 3 7 8 9 10 TheOil Market andGlobalFinance 11 in the1980s 12 13 14 Catherine R. Schenk 15 16 17 The1980s wasaturbulent time in global fi nancial markets due to 18 arange of economicand political factors,including asurge in 19 fi nancial innovation andthe liberalisationofnationalcapital markets. 20 Newmonetary policy toolssoughttochoke infl ationary pressure 21 that hadpersisted fromthe 1970sthrough aggressive(butnot 22 always consistent) monetary contraction that resultedinhighand 23 volatile globalinterest rates. Theoutcome was aseriesofgyrations 24 in international capitalmarkets throughthe decadethatinteracted 25 with innovationsinoil marketsand shifts in theglobal business 26 cycle. Thischapter addresses howthe three structuralbreaksinthe oil 27 pricein1974, 1979 and1986 createdchallenges forglobal energy 28 markets andprompted market innovation to managethese new 29 risks. In order to understand the fi nancialisationofthe global oil 30 marketinthe 1980sthe nextsection reviews thechanges in the 31 structureofthe oil priceinthe decade before the Saudiprice counter- 32 shock in 1985– 6. Thefollowing section examines the uneven process 33 of innovation in futures markets in theUnitedStates andLondon. The OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

56 Oil Counter-Shock

34 35 36 37 38 39 40 41 42 43 44 45 Figure 3.1 Monthly Dubai Arab Crude price. Source: Global Financial 46 DatabaseIMF. 47 48 thirdsection focusesonthe turning pointofthe counter-shock and a 49 ﬁ nalsection concludes. 50 51 Innovations in the Structure of the Oil Price 52 53 The structure of the oil market is especially complicateddue to the 54 diversity (both political and geographic) of crude suppliers, the range in

55 the qualityofthe rawmaterial depending on its density and sulphur

, , , , , 56 content (characterisedas light, , heavy , sweet )that determines the yield 57 after refi ning, and the diversity of refi ned productssold to the fi nal 58 consumer. The long distancesthat crude oil is shipped and the time 59 required for refi ning and re-shipping fi nished products to their fi nal 60 market adds another layerofuncertainty over pricing – what might 61 seem an appropriate price at the start of any transaction mightseem 62 hopelessly out of line with pricesprevailing at the time of delivery. In the 63 1980s it could take up to 45 daysfor crude oil to reach markets in North 1 64 AmericaorJapan from Gulfproducers. A fi nal complication is that 65 from the late 1970s the oil trade wasalmost exclusively denominated in 66 US dollars and this introduced exchangerisk for consumers and traders OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

The Oil Market and Global Finance in the 1980s 57

67 outside the United States. In the ﬁ rst half of 1974 about 40 per cent of , , 68 Nigeria sand Kuwait soil revenuesand 18 per cent of Saudi oil was 69 denominatedinsterling because this was the currency used in the 70 contracts with the oil companies, bothBritish companies and other 71 multinationals.2 By the end of 1974,however, the share of revenues in 72 sterlinghad declined sharply and the dollar was dominant.

73 Up untilthe 1970s, in ordertodealwiththese market complexities,a

, 74 smallnumberofmajor multinationals,known as the se, vensisters , 75 internalised theirsupplychainstocontrol thesupplyand thereforethe 76 priceofcrude oil. This also suited thestate supplierssince theirroyalties 77 andrevenuesweresecured in long-termcontracts.Instead of open market 78 prices,contracts between theoil companiesand thesupplying 79 governmentswerebased on apostedprice that wasnegotiatedbetween 80 thetwo partiesratherthanbymarketdemandand supply. 3 Anysurplus oil 81 wastradedbetween themajor companiesatadministeredpricesrather 82 than throughanopenmarket. Untilthe fi rstoil crisis in 1973– 4, therefore, 83 theprice of oilwas mainly setbythe majoroil companieswithlittle 84 competitionfromsmaller independentcompanies. There was no 85 generalisedopenmarketfor crudeoil or oilproductsand prices were 86 controlled throughadministrativearrangements. Thesearrangements 87 only begantocrumble in theearly 1970sasdemandincreased (thereby , 88 creating asellers market), oil fi elds were nationalised,termcontract 89 pricingchanged andpricesbecamemoreresponsivetomarketconditions. 90 On 16 October1973, in thewakeofthree yearsofrising 91 globaldemandfor oil andthe refusalofthe major multinationaloil 92 companiestoincrease thecontract price, theOPEC nations 93 unilaterally increasedthe priceofArabian Light Crude from $3.65to 94 $5.119 perbarrel. Threedayslater theAraboil exporters announced a 95 5per cent reduction in production untilthe Israelioccupation of Arab 96 territorywas reversed.Thismarkedaseismic shiftinthe post-war oil 97 industryand launched the global economy into anew era. 98 Nationalisation of oil fi elds followedasproducingstatesbroke their 99 traditionalrelationships with themajoroil companiestoreapmore of OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

58 Oil Counter-Shock

100 therevenuesfromtheir newlydiscovered pricesetting power. In the 101 processofincreasingtheir equity shares of production,OPEC

102 countriesgained controlofcrude oil suppliesthattheycould sell either

, 103 on an open marketorat ,buy-back prices to the multinationaloil 104 companies, promptingacomplicatedprice structure of Offi cial Selling 105 Price, buy-backprice andpostedprices. By 1975, thesystemwas 106 simpli fi ed as OPEC countriesset areference pricefor ArabianLight 107 348 APIand then settheir Offi cial SellingPrices forother crudes 108 aroundthisreference productaccording to therelativequality of the 109 oil. But this processwas notwithout itschallenges andSaudi Arabia 110 emergedasanimportant disruptiveforce in the1970s since it tended 111 to lose market share when theof fi cial OPEC priceincreased. In 1976 112 andagain in 1980Saudi Arabia brokeranks andposted alower marker 113 pricefor itscrude than otherOPECmembers. 4 114 As the major multinational oil companies lostcontrol of crude 115 supplies, there wasarapid increase in the number of competing 116 customers for nationalisedoil producers so that by 1982 Robert Mabro,

117 Director of the Oxford Institute for EnergyStudies, estimated that 118 at, ypical OPEC country has between twenty and forty customers 119 including previous concessionaires, US independents, European and

120 Japanese companies, Third World companies, refi ners,traders and 121 governments, . 5 Although it was still not afully open and competitive 122 market, therewas awidely disseminated spot price published in the 123 fi nancial pressthat applied to the fringe companies and other minor 124 actors in the market. But these prices in the spot market still did not 125 refl ect the bulk of the crude oil trade. Until the late 1970s, the IMF

, 126 estimated that almost 90 per cent of the world soil was so, ld under long 127 term contracts based on pricesset by the major oil producers, and the 128 other 10 per cent was bought and sold informally between the

, 129 international oil companies, but by 1984 about 90 per cent of the world s 130 oil was available through the spot market.6 J.E. Hartshorn suggests such

131 high estimates for the proportion of crude oil tradedinspot markets in 132 the early 1980sisexaggerated, noting that it, is impossible to verify them OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

The Oil Market and Global Finance in the 1980s 59 133 because in open markets the samecrude is often sold several times over, . 7 134 This emphasises the lack of transparency in the market. 135 Thesecondmajor oilprice shockarising from theIranian Revolution 136 in 1979 prompted afurther transformation of oilpricing.Frommid-1978 137 oilpricesbegan to rise sharplyinresponsetorapid industrial growth. 138 Superimposedonthiscyclicalincreaseindemandwas precautionary 139 demand duetopolitical instability in Iran that seemed to threaten future 140 supplies. 8 This left theOf fi cial SellingPrice (earnedbyOPECproducers) 141 well behind thespotprice that couldbeearnedbythe oilcompanies selling 142 to consumers, refi ners or otheroil companieswhich didnot have direct 143 access to suppliers. Thegap betweenthe spot price, thereference priceand 144 theof fi cial sellingpriceseventuallypromptedstate producerstoabandon 145 theirtermcontracts andinstead to sell directly to amorecompetitive 146 market.Anexception wasSaudi Arabia,which retained itslong-term 147 contractswiththe Aramco companies(Exxon, Chevron, Texaco and 148 Mobil). 9 In theend,the oilprice spikeof1979 wasshort-lived,partlydue 149 to thedecline in precautionarydemandasnew supplierssuchasMexico 150 entered the market and non-OPEC, non-MiddleEastproduction 151 increasedits global share. As thespotprice fell belowthe OPEC reference 152 prices,moreconsumers were drawntothe spot market.The trend to more 153 arms-lengthtrading betweenproducers andvarious consumerscreated 154 spacefor newindependent companies, enhanced theimportanceofthe 155 spot market andincreased thevolumeoftrade channelled throughthis 156 more transparentprice settingmechanism. 157 In turn, OPEC producers were forcedtoreact to the falling spot price. 158 On 14 March 1983,for example, members of OPEC met to set 159 production quotas and to reassess the benchmark crude oil price,which 160 wasthen $34 per barrel when the spot price for Dubai Light Crude was 161 $29 per barrel. At their March meeting they agreed to reduce the 162 benchmark price to $29 perbarrel and this reduced volatility in the

163 market, but the gap between administered and spot prices continued. 164 As the Managing Director of the IMF noted in 1991, from, the mid-1980s 165 onwards, it appeared less and less appropriate to try to post ofﬁ cial prices OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

60 Oil Counter-Shock

166 that were at oddswith spot and futures prices prevailing elsewhere in the 167 world and to maintain them for contracts , . 10 168 In summary,the key factors affecting the structure of the price of oil 169 in the decade or so before the 1985– 6oil price collapse were: 170 171 1. the separation between producers and the major oil supplying 172 companies that produced aspot marketrather than longer-term 173 contracts; , 174 2. the disintegration of the oil companies control of the supply so that 175 they no longer internalised price fl uctuations between products and 176 producers andalso no longer could rely on along-term supply of 177 crude oil; , 178 3. the uncertainty about the OPEC group sability to manage prices 179 through controlling supply, especially when the priceofoil was 180 falling and supply from outside OPEC increased. 181 182 Overlyingthese structural changeswas theadventofhigh(andvolatile) 183 real interest ratesinthe 1970s andearly 1980s. Inconsistent effortsto 184 containin fl ationthrough monetary policy in thelate1970s andthenthe 185 more deliberate policy of Paul VolckerasChairmanofthe FederalReserve 186 in 1979– 80 meantrealinterestrates rose sharply. This hadtwo effectson 187 oilmarkets.Monetarycontraction slowed growth in theUnitedStatesand 188 otheradvanced economies, leadingtoarelaxationinthe pressure of global 189 demand foroil andasystemic declineinboththe real andnominal oil 190 price. At thesametime, higher interest ratesincreased thecostofstoring 191 oilfor consumersand made thefutures marketamore attractiveway to 11 192 hedgeriskcomparedtobuildingupinventories. 193 194 Innovations in Spot and Futures Markets 195 As the oil price moved gradually toward amarket price, it becamemore 196 volatile. In the mid-1970s, refi ners buying crude from OPEC countries

197 were much more affected by ﬂ uctuations in prices, which createda

, 198 demand for stabilise, rs in the market such as futuresand swaps.12 New OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

The Oil Market and Global Finance in the 1980s 61

199 entrants and new suppliers (outside OPEC) meant the marketbecame 200 more differentiatedbythe location and quality of oil. Finally,the 201 unstable cartel, with its competing interests among the member states, 202 introduced an over-arching level of uncertainty about whether they 203 would be able to control the price movementscollectively, or if supply 204 shocks (either increases or decreases) were possible at any moment. 205 Table 3.1 shows the development of energy futures markets in crude 206 and variousre fi ned products from the autumn of 1974. Threeaspects 207 emerge. First, as noted above, not all innovationswere successful. Most 208 of the early experiments were dormant by 2000. Secondly,there was a 209 range of delivery formsand size of contract depending on the product 210 and location of the exchange. Thirdly, the markets becameglobal, 211 spreading from New York to London and then to Singapore. Along with 212 the extension of the location of markets across time zones and arange of 213 delivery options in the United States, Europe(and eventuallySingapore) 214 shown in Table 3.1, the maturity of the contracts available alsoincreased. 215 In the fi rst years, most futures contracts were less than three months, but 216 by 1989 trading was extended to 12 months. However, it was only in the 217 1990s that much longer contractsfor up to threeyears ahead became 218 available.13 219 Theoil crisisof1973– 4prompted the fi rstfutures marketsin 220 NewYork in Septemberand October1974, buttheydid notsurvive. 221 In 1974, asugar futures trader, Emmett Whitlock, persuaded NYMEX 222 to develop gasoil andBunker Coil futureswithdelivery in Rotterdam, 223 followed by theNew York Cotton Exchange opening crude oil futures, 224 alsowithdelivery in Rotterdam.14 Butthese experiments were not 225 successful becauseofthe distant delivery centreand therushfor 226 currentsupplies. Trading wastoo thin,priceswere toostable and the 227 market was not liquid enoughtobeauseful hedge. In November1978 228 these contracts were converted to deliverinNew York Harborand the 229 No 2heating oilfutures contract began to gain traction,withits fi rst 230 delivery of over 250 million barrels in March 1979. This innovation was 231 helped by theappetiteofsmaller fi rmsthathad no access to the spot 264 263 262 261 260 259 258 257 256 255 254 253 252 251 250 249 248 247 246 245 244 243 242 241 240 239 238 237 236 235 234 233 232 OCS

Table 3.1 Evolution of forward contracts in oil and oil products, 1974– 90 Chapte Start of Status as r3 Contract Exchange Trading of 2000 Size DeliveryMethod —

Crude Oil (Rotterdam) NYCE Sept 1974 Dormant 5,000bbl Physical 1/2/

Gas Oil (Rotterdam) NYMEX Oct 1974 Dormant 100 metric tons Physical 2018 BunkerCOil (Rotterdam) NYMEX Oct 1974 Dormant 100 metric tons Physical No2 Heating Oil (NY Harbor) NYMEX Nov 1978 Active 42,000 gal Physical — NANDHINI No 6Fuel Oil (NY Harbour) NYMEX Nov 1978 Dormant 42,000 gal Physical Gas Oil (ARA) IPE April 1981 Active 100 metric tons Physical No 2Heating Oil (Gulf Coast) NYMEX August 1981 Dormant 42,000 gal Physical Leaded Gasoline (NY Harbor) NYMEX Oct 1981 Dormant 42,000 gal Physical Leaded Gasoline (Gulf Coast) NYMEX Dec 1981 Dormant 42,000 gal Physical .P—

Propane (Mont Belvieu, TX) NYCE Dec 1981 Dormant 42,000 gal Shipping Certiﬁ cate 571963 UnleadedRegular Gasoline CBOT Dec 1982 Dormant 42,000 gal Depository Receipts (Gulf Coast) —

Crude Oil (Cushing OK) NYMEX Dec 1982 Active 1,000 bbl Physical IBTa Crude Oil (St James, LA) CBOT March 1983 Dormant 1,000 bbl Depository Receipts No 2Heating Oil (Gulf Coast) CBOT Mar 1983 Dormant 42,000 gal Depository Receipts uris Crude Oil (Brent) IPE Nov 1983 Active 1,000 bbl Physicals (1983) Cash Settlement (1985) Cash Settlement/ EFP (1988) Leaded Gasoline (Gulf Coast) CME Mar 1984 Dormant 42,000 gal Physicals 297 296 295 294 293 292 291 290 289 288 287 286 285 284 283 282 281 280 279 278 277 276 275 274 273 272 271 270 269 268 267 266 265 OCS

No 2Heating Oil (Gulf Coast) CME Mar 1984 Dormant 42,000 gal Physicals Chapte Unleaded Gasoline (NY Harbor) NYMEX Dec 1984 Active 42,000 gal Physicals

Heavy Fuel Oil (ARA) IPE Oct 1986 Dormant 100 metric tons Physicals r3

Propane (Mont Belvieu LA) NYMEX August 1987 Active 42,000 gal Physicals —

High Sulfur Fuel Oil (Singapore) SIMEX Feb 1989 Dormant 100 metric tons Physicals 1/2/

Residual Fuel Oil (NY Harbor) NYMEX October 1989 Dormant 42,000 gal Physicals 2018 Natural Gas (Henry Hub) NYMEX April 1990 Active 10,000MMBtu Physicals

Crude Oil (Dubai) SIMEX June 1990 Dormant 1,000 bbl Cash Settlement — Crude Oil (Dubai) IPE July 1990 Dormant 1,000 bbl Cash Settlement NANDHINI

ARA ¼ Amsterdam, Rotterdam, Antwerp area. IPE ¼ International Petroleum Exchange London. NYMEX ¼ New York Mercantile Exchange; CME ¼ Chicago Mercantile Exchange; CBOT ¼ Chicago Board of Trade. Source: Steven Errera and Stewart Brown, Fundamentals of Trading Energy Futures &Options (Tulsa, 2002), pp. 150– 2. .P— 571963 — IBTa uris OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

64 Oil Counter-Shock

298 market in heatingoil (which wascontrolled by themajoroil 299 multinationals) and by theriseinthe priceofheating oil in the 300 UnitedStates at thestart of 1979.InApril 1979 President Carter 301 announced that he intended to decontrol thedomesticoil market from 302 June 1979. 15 Themarket wasalso supported by institutional structures 303 such as theCommodityFutures TradingCommissionAct of 1974, 304 whichestablished theCFTC(CommodityFutures TradingCommission) 305 to govern themarketasasuccessortothe CommodityExchange 306 Authority(whichhad been an agency of theDepartmentofAgriculture, 307 andcovered alimited rangeofcommodities). 308 Nevertheless, the gas and heatingoil futures markets were slow to 309 develop.The major oil companies shunned the market.16 In 1983

310 only ﬁ ve of the seven sisters used the New York futuresmarket

, ,

311 intermi, ttently while Standard Oil and Exxon were still reluctant to be 312 involved, . 17 By mid-1986 Exxon was the only major oil company still ,

313 not participating in the market; Exxon sPresident, LawrenceG.Rawl

314 commented that since, the company deals in wet (physical) barrels, 315 futures are not very usefulfor our operation, . 18 Moreover, there waslittle 316 arbitrage possible betweennational futuresmarkets since the marker 317 crude in New York was West Texas Intermediate which could not be 318 exported and did not maintain aconstantprice differential with Brent 319 crude, which wasthe European marker crude. 320 In London,gas oil futures were launched in April 1981 for delivery in 321 Amsterdam, Rotterdam and Antwerp to service the European market. 322 The International PetroleumExchange (IPE) was originallyestablished 323 as amutual society among energy companies and fi nancial fi rms. Thirty- 324 one fl oor traders traded contractsinmorning and afternoon sessionsin 325 lots of 100 tons with avalueofabout $30,000atthe time. The contracts 326 allowed ahedge for up to nine months ahead of delivery. Gas oil was 327 chosen since it had alarger proportion of trading on the open market 328 across awide range of sectors compared to crude oil.19 329 The fi rst crude oil futuresmarkets were launched in Chicagoand 330 NewYork in March1983 fordelivery in St JamesLouisiana and OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

The Oil Market and Global Finance in the 1980s 65

331 332 333 334 335 336 337 338 339 340 341 342 343 Figure3.2 NYMEX crude oil futures contracts daily volume of trading, 344 1983 – 9. Source: Global Financial Data. 345 346 CushingOklahoma respectively.Contracts in each case were for 1,000 , 347 barrels of domestic crude.The ChicagoBoard of Trade was theworld s 348 largestcommoditymarket but, in thelongrun,the NewYork exchange 349 was moresuccessful, reachingadailyturnoverofover2,000lotson 350 average with open interest (unful fi lled delivery commitments) of about 351 12,000per daywithinsix months, compared with open interest of only 352 1,400 lots in Chicago. 20 At thetime, the FinancialTimes attributed New , 353 York ssuccess to theircloser links to theoil industry,which meantthat 354 about70per cent of theturnoverwas directlyrelated in theoil business 355 with only about30per cent dueto fi nancialspeculators. 21 Moreover, , 356 Chicago sdelivery and payments systemswere more complex andNew 357 York benefi ted by having morecapacityinenergytradingbecauseof 358 theirearlierre fi ned products futures markets.22 Figure 3.2shows that 359 volume of turnoverinfutures contracts in NewYork increased in the 360 fi rst quarter of 1985 andagain in the fi rst quarter of 1986 with aspike in 361 trading at theend of July. , 362 London sIPE launched its fi rstattempt at crudeoil futuresin 363 November 1983. On openingday,224 lots of 1,000barrels were traded,but OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

66 Oil Counter-Shock

364 themarketnever took off. Thecontracts for1,000 barrel lots were too 365 smalltobeviablesince Brent crudewas usuallydelivered in cargoesofat 366 least500,000 barrels. In April1984,the existing contractswerewithdrawn 367 sincethere wasnoactivetrading.Ittookoverayear to design andlauncha 368 newcontractinNovember1985withcashsettlementinoil indexfutures 369 rather than physical delivery. 23 Thenew contract wasbased on adaily 370 priceindex of 15-day forwardcargoes of Brentblend at Sullom Voein 371 Scotland rather than theoriginalcontractinvolving aphysicaldelivery 372 option at Rotterdam.24 However, successwas stillelusive andonlytwo or 373 threecargoes were traded dailyduringthe ﬁ rstfew months of 1986. , 374 Tradingdried up by themiddleofthe 1986 afterpricesfell.25 TheIPE s 375 second attempttoinitiateacrudeoil futuresmarkethad failed. 376 An importantproblem wasthatarivalunregulated market in 15-day 377 Brentforward contractshad alreadyemerged in 1981. 26 Britishtax 378 arrangements with companiesoperatinginthe NorthSea Oil ﬁ elds 379 required some pricediscovery to establishtax liabilities, andthe majors 380 used a15-dayforward market in 500,000barrelcargoes to establishthis 381 price. Butthe market operated withoutthe safety netofaclearing houseor

382 institutionalbacking.InFebruary1986sometraders were caught outby

, 383 fallingprices, leadingtodefaultsalong the da, isychain of sold andre-sold 384 contractsand some of themajorswereforcedtobailout weaker traders

385 afterdefaultsoncontracts.Another aspect wasthatinNew York there

, 386 were more lo, cal or independenttraders in themarketratherthanjustthe 387 industrial suppliersand usersofcrude andthisincreased turnover and 388 liquidity. In London, theIPE restricted entrytoits ownmembers and 389 relied more on theparticipation of themajor oilmultinationals, whowere 390 still reluctantparticipants. 391 In August 1986, in thewakeofthe Saudi pricecounter-shock, theIPE 392 appointedaspecial advisorycommittee,including representativesofthe 393 major oil companies, to consider howtoestablish acrude oil futuresmarket 394 to recapturethismarket into amore regulated andtransparent institution. 27 395 Thelosses earlierinthe year in theunregulated forwardmarket madea 396 formal exchange moreattractive to themajors,but it took almosttwo years OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

The Oil Market and Global Finance in the 1980s 67

397 to launchthe thirdattempt at aBrent crudefutures market.The new 398 contractlaunchedinJune1988was much moresuccessful. Prices were still 399 volatile andBrentCrude hadbecome more importantasabenchmarkfor 400 many MiddleEasterncrude oil,making it ausefulhedge.The IPEcontract 401 was only 1,000 barrels,making theriskmuchmoremanageablefor smaller 402 traders than theunregulated 15-day market with itsminimum of 500,000 403 barrels. Thevalue of aseatonthe IPEincreasedfrom£8000 in 1985 to over 404 £75,000inearly1989 and£170,000 by October1989. In 1989 the traditional 405 lunchbreakwas scrappedtoallow theexchange to be operationalbefore , 406 NewYorkopened.28 London ssuccess wasreinforced by thenarrowness of 407 theNYMEX whichwas limited to WTI crude,which responded mainly to 408 local market factorsinthe United States rather than global oilmarket 409 developments.London fi nallyhad acompetitivefutures marketincrude oil 410 fi ve yearsafter NewYork. 411 In summary, the early futuresmarkets launched in New York and 412 London were not immediately successful and it took some time to design 413 useful contracts and to attract arobust volume of business. The fi rst 414 experiments in the 1970s were plagued by alack of suffi cient volatility in 415 the spot price and thin trading, which underminedtheir effectiveness 416 bothasahedgeand as aiding price discovery.Well-functioning futures 417 markets required the structural changes to the oil trade describedin 418 Section Itobecomeviable. While tradingincreasedin1978, it was the

419 1979price shock that prompted an expansionofthe demandfor futures 420 contracts. Even by 1982,however, Mabro predicted that dea, lings in

421 futures may soon becomeaninteresting (thoughnot very signiﬁ cant) 422 feature of the world petroleum market, . 29 The prospects looked 423 unpromising until the collapse in oil prices introduced new volatilityin 424 1985 – 6that drew hedgersinto the futures markets.30 425 426 Oil Markets and the 1985–6 Counter-Shock 427 428 The1985 – 6oil pricecounter-shock appeared as aconﬂ uenceofevents 429 andboreout thevulnerabilities in themarketintroducedinthe 1970s. OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

68 Oil Counter-Shock

430 OPEC setanof fi cial pricetotry to infl uenceglobalspotpricesbut their 431 effectiveness eroded by theend of 1984 andthe benchmarkcrude price 432 wasreduced from $29to$28 perbarrelinJanuary 1985. OPEC suppliers 433 were knowntobeofferingdiscounts on theof fi cial pricetosome 434 customers, andthere were complexbarteragreementsand misalignments 435 of offi cial prices betweendifferent typesofcrude oil.31 At theend of 1985 436 SaudiArabiaabandoned itssupport andthe spot pricefellsharply,due 437 both to increasedsupplyand thereduction in precautionarydemandasit 438 became clearthatOPECwas unable to containsupply. In July 1986 the

439 Saudigovernmentbegan to priceits oilinrelationtothe prices of reﬁ ned

, 440 products rather than themarkercrude price. The ne, tback crudeprice 441 worked back from theprice of theultimatere fi nedproduct less thecosts of 442 transport andprocessing. Theresult wasacollapse in thecrude oilprice. 443 Figure 3.3 shows that dramaticchange in the one-month and three- 444 month futurescontracts traded on the NYMEX for WTI delivery at 445 Cushing Oklahoma. Clearly the futures prices closely trackedthe spot 446 price through the 1985– 6oil pricecounter-shock. 447 Figure 3.4 shows that the margin between three-month and one- 448 month futuresincreasedsharply in 1985 and also increased in volatility 449 while the oil price actually rose. 450 The rising discount refl ectedloss of confi dence in the summerof 451 1985 in the ability of Saudi Arabia to constrain supply and to hold OPEC 452 together.32 Nevertheless, the nominal future and spot prices continued to 453 rise until 20 November 1985, due to uncertainties about supply arising 454 from the Iran– Iraq war and the temporary suspension of Soviet supplies. 455 In the fi rst quarterof1986, three month prices exceeded the one-month 456 price, but this was reversed in the secondquarter. When the Saudi 457 governmentabandoned the reference price in the second half of 1985 458 and embarked on net-back pricing, the discount on three months 459 compared to one-monthcontracts increased again. Figure 3.5 shows, 460 however, that the margin between one- and three-month futures prices 461 then stabilisedduring the Iran– Iraq war, only increasing in volatility in 462 1989 in the wake of fresh confl ict in the Middle East. OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

The Oil Market and Global Finance in the 1980s 69

463 464 465 466 467 468 469 470 471 472 473 474 475 Figure3.3 NYMEX WTI Crude oil at Cushing, Oklahoma, futures 476 contracts and spot price ($/bbl). Source: Global Financial Data. 477 478 479 480 481 482 483 484 485 486 487 488 489 490 491 492 493 Figure3.4 Margin between three-month and one-month crude futures 494 contracts ($/bbl). Source: US EnergyInformation Administration 495 (underlying data). OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

70 Oil Counter-Shock

496 497 498 499 500 501 502 503 504 505 506 507 Figure 3.5 NYMEX crude futures contracts: spread betweenhigh and 508 low prices,1983– 9. Source: Global Financial Data:NYMEX Crude 509 Oil Futures. 510 511 Figure 3.5 shows that the daily volatility in high and low prices 512 tended to remain around 0.5 per cent of the closing priceonaverage until 513 November 1985,and it peakedatthe end of July 1986 at almost 16 per 514 cent when the Saudis allowed the price to fall. Thereafter, volatility was 515 still on average higher than in the early years of the 1980sbefore the 516 Saudi price counter-shock.

517 The effectiveness of futures markets in predicting oil prices has been 518 widely debatedineconomics literature. In 1993, the IEA noted that the,

519 timely price information conveyedbythe futures market helped prices to , 33 520 effi ciently and expeditiously balanceoil supply and production . But 521 the relationship betweenfutures prices and spot prices continues to be 34 522 debated. The pricediscovery function of futures markets depends on 523 the fasterand more effi cient response to information in futures markets 524 because of lower transactions costs and the facilitiesfor short-selling in 35 525 response to news. When futures markets help to clarify prices, they 526 support transparency and effi ciency in markets and therefore play a 527 positive role in the allocation of resources rather than just being an outlet 528 for destabilising speculation. But empirically,different methodologies OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

The Oil Market and Global Finance in the 1980s 71

529 across different oil markets produce different results in testing these 530 effects. It is also important to recognise that expectationsabout the future 531 areexpressedthrough spot prices as well as futuresmarkets. 532 Thereisalso debate about whether demand or supply factors are the 533 primarydeterminantofspotprice fl uctuations since the1970s. 534 Christiane Baumeister and Lutz Kilian relate price movementtoshifts 535 in underlying demand due to fl uctuations in the global business cycle.36 536 But there are also effects from shifts in stocks or inventoriesarising from 537 uncertainty about future price changes due to geopolitical tensions or 538 expectations about the future global business cycle. Kilian and Daniel 539 Murphy, for example, fi nd that about one-third of the rise in the spot 540 priceofoil in 1979 was due to inventory demand in anticipation of future 541 oil shortages due bothtogeopolitical andtoglobal business cycle 542 factors.37 On the other hand, J.D. Hamilton fi nds agreater role for supply 543 side shocksboth withinand beyond OPEC.38 544 The surge in the priceofoil in 2003– 8prompted claims that the 545 fi nancialisation of the oil market contributed to rises in the spot price, a , 546 phenomenon known as the Master sThesis after testimony before the US 547 Congress by Michael Masters, an Atlanta-based investment advisor.39 548 Masters argued that the futures prices were in practice used to 549 benchmark spot prices in arange of food and energy markets including 550 WTI crude oil as well as heatingoil, gasoline and natural gas. The logic 551 wasthat arush of new entrants to the market (so-calledindex speculators 552 unrelated to the oil or other commodities industry) increased speculative 553 demand for contracts that drove up the oilfutures price. This in turn 554 signalled to other market participants that thereshould be arise in the 555 spot price and also encouraged the accumulation of inventories that 556 caused actual rises in the spot price. Thereare robust empirical studies 557 that show that the futuresprices are closely correlated to the spot price, 558 but the causality and the link between fi nancialisation, speculation and 559 pricein fl ation is less clear.40 In particular, it is diffi cult to separate the 560 speculativeeffects from the underlying changes in the demand for oil due 561 to the global business cycle, including increaseddemandinfast-growing OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

72 Oil Counter-Shock

562 economies in Asia. Thus, Bassam Fattouh, Lutz Kilian andLavan 563 Mahadeva found that crude oil pricescorrelatedvery closely to non- 564 fi nancialised commodity markets, suggesting that the fi nancialisation of 565 the oil marketitself was not amajor determinant of price movements.41 566 567 Conclusion 568 , Oil simportancetothe modern industrial worldhas prompted extensive 569 considerationofthe impact of oilprice gyrationsinthe 1970s and1980s 570 on national economic performance, butlessattention hasbeenpaidtothe 571 impact on global fi nancialmarkets.The structureofoil prices continuesto 572 be acomplex issuethatre fl ects thecomplicated andprolonged supply 573 chainfor this essentialcommodity.Lackoftransparencycontinues to 574 be achallenge sincepricesare notfully visibletothe market.Instead, 575 benchmarkpricescontinuetobeimportant andprivate sector price 576 reportingagencies such as Platts,Argus Media, Asia PetroleumPrice 577 Indexand ICIS London OilReportprovide themarketwithessential 578 information, butnot always in aconsistentway. 42 In May2013, the 579 EuropeanCommissionlaunchedaninvestigation into potentialmarket 580 riggingbymanipulatingoil benchmarks,raiding theof fi cesofShell,BP 581 andStatoil.Even though theinvestigation wasdropped in December2015, 582 this episodeemphasisesthe persistent challenges to transparency in oil 583 pricesetting. 584 In 1973,onthe eve of the fi rst oil crisis, prices were administered 585 amongasmallnumberofmajormultinational companiesand 586 producers. In 1974,and again in 1979,the structure of the oil price 587 was transformed by supply and demandshocks that disruptedthe 588 established framework.New entrants were drawn into boththe supply 589 and demandsides of the market and the internalised pricingstructure of 590 the oil industrywas eroded.The gyrationsinthe oil priceduring the 591 1980sneed to be viewedinthe context of this changingmarket structure. 592 , In turn, the market responded to increased arm slength tradingand 593 greater volatility by establishingforwardand futuresmarkets to hedge 594 OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

The Oil Market and Global Finance in the 1980s 73

595 risk. But the process wasnot smoothand manyinitiatives were 596 unsuccessful before thesemarkets were accepted by the industry. The 597 size of shipments, reluctanceofmajor oil companies to participateand 598 illiquidity plagued many early efforts until afterthe structural change 599 in the oil market in themid-1980s. This chapter has drawn on 600 contemporary accounts of the developments in New York and London 601 to demonstratethe challenges faced by thosethat sought to enhance the 602 fi nancialisationofthe oil market. 603 Several characteristics emerge. The innovations were supply driven 604 rather than demanddriven, i.e. the futuresmarkets were launched by 605 exchanges in New York and London seeking an opportunity to increase 606 the range of services they could offer. The markets were initially not 607 viewed with enthusiasm by customers until the oil price becamemore 608 volatile and marketoriented and the contract details and terms adapted 609 to the needs of arange of customers. Even after successful futures in 610 refi ned products, the establishment of future markets in crude oil prices 611 proved particularly challenging because of the lack of engagementfrom 612 the major oil multinationals. Once established in the late 1980s,the 613 futures markets remained uncontroversial through to the early 2000s. 614 However, the surge of new entrantsintothese markets as investors 615 sought yield in the low interest environment of the Great Moderation 616 attracted criticism once oil prices began along period of increase. 617 In 2010,for example,the G20 questionedwhether fi nancialisation 618 destabilised commodity markets including oil, although the economic 619 evidence for this effect is diffi cult to discern. What is not in doubt is that 620 the mid-1980s oil price counter-shock had lasting effects on the structure 621 of the oil marketand its pricing system. 622 623 Notes 624 1. Jack E. Hartshorn, Oil Trade: Politics and Prospects (Cambridge, UK, 1993), 625 p. 200. 626 2. Catherine Schenk, The Decline of Sterling: Managing the Retreat of an International Currency (Cambridge, UK, 2010), pp. 360– 3. 627 OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

74 Oil Counter-Shock

628 3. Bassam Fattouh, Th, eorigins andevolution of thecurrent internationaloil pricingsystem: acriticalassessment , ,inR.Mabro (ed.), Oilinthe 21st Century: 629 Issues,Challenges andOpportunities (Oxford, 2006), pp.41 – 100: 41.

630 4. Ibid., p. 51.

631 5. Robert Mabro, The, changing nature of the oil market and OPEC policies (1982), ,reprinted in R. Mabro (ed.), OPEC and the World Oil Market:

632

The Genesis of the 1986 Price Crisis (Oxford, 1986), pp. 75– 89: 80.

, 633 6. Manmohan Kumar, Forecasting, Accuracy of Crude Oil Futures Prices ,IMF 634 Working Paper, WP/91/93, October 1991, p. 2. Available at https://ssrn.com/ abstract ¼ 885065 (accessed 27 July 2017).

635 7. Hartshorn, Oil Trade,p.198.

636 8. Lutz Kilian, Not, All Oil Price Shocks are Alike: Disentangling Demand 637 and Supply Shocks in the Crude Oil Market, , American Economic Review

ic/3 (2009), pp. 1053– 69.

638 9. Fattouh, The, origins and evolution ,p.49.

639 10. Michel Camdessus, Remarks, by the Managing Director to the Ministerial Seminar of Oil Producing and Consuming Countries, ,1July 1991, IMF 640

Archives, Washington, DC (IMFA), MD/Sp/91/11.

, 641 11. Kumar, Forecasting, Accuracy ,p.3. 642 12. Morris Adelman, The Genie out of the Bottle: World Oil since 1970 (Boston,

1995), p. 5.

643 , 13. Kumar, Forecasting, Accuracy ,p.4. 644 14. Steven Errera and Stewart Brown, Fundamentals of Trading Energy Futures 645 &Options (Tulsa, 2002), p. 77. 15. Ibid.

646 ,

16. Oil, Futures Trading Comes to London , Financial Times,20February 1981.

647 17. AL, ondon Launch for Crude Oil Futures , Financial Times,26October 1983.

, 648 18. David Owen, Oil, Futures Trading Rides High on Back of Opec Disarray ,

Financial Times,19June 1986.

, 649 19. John Edwards, London, Oil Futures Market Launched , Financial Times,

650 11 February 1981.

, 20. AL, ondon Launch for Crude Oil Futures , Financial Times,26October 1983. 651

21. Ibid.

652 22. David Owen, Oil, Trading: Financial Times Survey: Experience Wins over

653 Chicago, , Financial Times,3February 1987.

23. John Edwards, Oil, Futures Change Planned , Financial Times,11April 1984.

654 , 24. Andrew Gowers, November, Start for Oil Index Futures , Financial Times,

655 4October 1985.

656 25. David Owen, Oil, Futures Trading Rides High on Back of Opec Disarray , Financial Times,19June 1986; Lucy Kellaway, October, Launch for Oil

657 Products Futures, , Financial Times,20June 1986.

658 26. Hartshorn, Oil Trade,pp. 208– 9.

, 659 27. Lucy Kellaway, London, tries again on crude oil futures , Financial Times, 20 August 1986. 660 OCS Chapter3— 1/2/2018— NANDHINI.P— 571963— IBTauris

The Oil Market and Global Finance in the 1980s 75

, , 661 28. London, sCrude Oil Traders Look to the Futures , Financial Times,

, 25 January 1989; Laura Raun, Rotterdam, Oil Futures Challenge to London s

662

IPE, , Financial Times,31October 1989.

663 29. Mabro, The, changing nature ,p.81.

, 664 30. David Owen, Oil, Futures Trading Rides High on Back of Opec Disarray , Financial Times,19June 1986. 665 31. IMF, World Economic Outlook,Supplementary Note 4, World Oil Situation, 666 11 March 1985, IMFA, SM/85/73. 667 32. Adelman, The Genie,pp. 222– 3. 33. IEA, Performance Proﬁ les of Major Energy Producers (Collingdale, 1983),

668 p. 49.

, 669 34. See, for example, Keshab Shrestha, Price, discovery in energy markets ,

670 Energy Economics xlv/C (2014), pp. 229– 33.

35. Kenneth Garbade and William Silber, Price, movements and price discovery 671 in futures and cash markets, , Review of Economics and Statistics lxv/2 (1983),

672 pp. 289– 97. 36. Christiane Baumeister and Lutz Kilian, Forty, Years of Oil Price Fluctuations:

673 Why the Price of Oil May Still Surprise Us, , Journal of Economic Perspectives

674 xxx/1 (2016), pp. 139– 60.

675 37. Lutz Kilian and Daniel Murphy, The, Role of Inventories and Speculative Trading in the Global Market for Crude Oil, , Journal of Applied Econometrics

676

xxix/3 (2014), pp. 454– 78.

, 677 38. J.D. Hamilton, Causes, and Consequences of the Oil Shock of 2007– 08 ,

678 Brookings Papers on Economic Activity (2009), pp. 215– 59. 39. Abby Kim, Does, Futures Market Speculation Destabilize Commodity

679 Markets, , Journal of Futures Markets xxxv/8 (2015), pp. 696– 714; Testimony 680 by Michael Masters, Managing Member/Portfolio Manager, Masters Capital 681 Management LLC before the Committee on Homeland Security and Governmental Affairs, US Senate, 24 June 2008. Available at www.hsgac.

682 senate.gov/download/062408masters (accessed 25 July 2017). 683 40. Yue-Jun Zhang and Zi-Yi Wang, Investigating, the price discovery and risk transfer functions in the crude oil and gasoline futures markets: Some

684

empirical evidence, , Applied Energy 104 (2013), pp. 220– 8; Renan Silverio 685 and Alexandre Szklo, The, effect of the ﬁ nancial sector on the evolution of oil

686 prices: Analysis of the contribution of the futures market to the price discovery process in the WTI spot market, , Energy Economics xxxiv/6 (2012), 687

pp. 1799– 808.

688 41. Bassam Fattouh, Lutz Kilian and Lavan Mahadeva, The, Role of Speculation 689 in Oil Markets: What Have We Learned So Far?, , Energy Journal xxxiv/3 (2013), pp. 7 – 33.

690 , 42. Oil, Price Reporting Agencies ,Report by IEA, IEF, OPEC and IOSCO to 691 G20 Finance Ministers, October 2011. Available at http://www.iosco.org/ 692 library/pubdocs/pdf/IOSCOPD364.pdf (last accessed 2March 2017). 693 OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

1 2 3 4 5 6 4 7 8 9 10 Counter-Shocked?The OilMajorsand 11 thePrice Slumpofthe 1980s 12 13 14 Francesco Petrini 15 16 17 There was nothing natural about laissez faire; free markets could never have come into being 18 merely by allowing things to take their course. 19 Karl Polanyi 20 21 What role did the oil majors play in the collapse of oil pricesinthe 22 1980s? 23 In the literature the origins of the counter-shock are usually

, attributed to the clums, ycartel (to borrow an expression from Morris 25 , Adelman), 1 that is to OPEC sincapacity of responding to the change that 26 the new market-dominated era brought into the oil business.Ineffect, 27 there is agood amount of truth in this assertion. The producing countries 28 were unable to cope withthe increasing imbalance, surfaced since the 29 early 1980s, between supply and ashrinking demand. 30 The specter of an oil glut, with the consequent price slump, has 31 , always been at the heart of the oil industry spreoccupations. After the 32 disastrousexperienceofthe 1930s, asystemofpro-rationing of crude 33 OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

Counter-Shocked? The Oil Majorsand the Price Slump 77

34 production was instituted in the United States,the largest oil producer

35 in the world, managed by the Texas Railroad Commission. At the

, 36 international level the oilmajors, the seven, sisters ,assured the balancing 37 of supply and demand through their system of vertically integrated 38 operations and the webofjointventuresbywhich they controlled the oil 39 outputofthe Middle East. In the 1940s and 1950s this system worked 40 quite well, thanks alsotothe elimination of part of the potential surplus 41 by variouspolitical vicissitudes, mainly the Iranian nationalisation in 42 1951, the Suez crisisin1956 and all over the period the penalisation of 43 Iraqi production which becamemore stringent after the nationalisation 44 law of 1961. The entry into the markets of the independent companies 45 produced the ﬁ rst creaks in the system and induced the majors to reduce 46 the postedprice,thus causingthe birth of OPEC. 47 With the momentous events of the late 1960stoearly 1970s, the 48 OPEC countrieswrestedfrom the majors the role of market regulators, 49 but, as far as the prevailing view goes, with the secondoil shock in 1979, 50 they ﬁ xed atoo highprice,which, in due time,brought about afall

51 in demand. Faced with this development and with the increasing

, 52 marke, tisation of the oil trade – characterised by the ﬂ ourishing of 53 the spot and futures markets – OPEC turned out incapable of 54 responding effectively. In the early 1980s the organisation tried to set up 55 aconcerted defence of the positionofsupremacy that it had conquered at 56 the beginning of the 1970s, but failed. In March1982 OPEC sought to 57 establish asystem of quotas, but the attempt soon aborted due to 58 recalcitrance of some key memberstorespect the assigned level of 59 output. Ayear later, for the ﬁ rst time in its history,OPEC declared a 60 pricecut, from $34 to $29 abarrel for the Arabian light,and established 61 new production quotas among its members.2 Again, these were not 62 respected and the market remained slack. In light of these dismal results, 63 the cohesion of the organisationofoil producing countries was 64 undermined by internecinestruggles and by the fundamental divergence 65 of interests amongsome of its key members. Saudi Arabia, which until 66 thenhad operatedasthe swing producer that ultimately balanced the OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

78 Oil Counter-Shock

67 market and in so doing had to cut drastically its production levels, made 68 aU-turn opting for an aggressiveproduction policy that led to the price 69 slump of 1986. , 70 In this interpretation,which stressesOPEC sinability to actasa 71 coherententity,there is virtually no room forthe oilcompanies 72 as actors playingasigni ﬁ cant role in determining theconditions 73 of theprice plunge.3 In effect, duringthe 1970sthe majoroil 74 companieswere forced to cedetothe OPEC countriesthe absolute

75 control they hadenjoyed in theprevious years over the oilmarkets.

, 76 During theso-called ,Golden AgeofOil ,thatisthe decades after

77 WorldWar II up to thelate1960s,the oilmajors, theso-called

, 78 ,sevensisters , 4 with theirvertically integrated structure, fromthe well 79 to thegasoline pump, hadbeendominatingthe production and 80 marketing of international petroleum,thatisofthe petroleum

81 exchanged outsidethe US market. 5

, 82 Thencame the oil, price revolution 6 and the industry changed 83 drastically.The majors lost the power to decide the price, and, with the

84 nationalisation of their assets in the producingcountries, they alsolost

, 85 control on reserves andproduction in the centr, eofgravity of the oil

86 industry,the Middle East. As shown in Table 4.1, the amountofoil they

87 directly producedand owned, equity, oil ,orthe crude they bought from

, 88 the producers on preferential terms, buy-ba, ck oil, decreased quite 89 dramatically during the 1970s. 90 However, at thebeginning of the1980s the big oil companies 91 remained amongthe mostsigniﬁ cant players on theworldscene.

92 As Lord Kearton, former chairman and chiefexecutive of theBritish 93 National OilCorporation,put it: ,These huge conglomerations of 94 inﬂ uence andpowerand potential will remain.[...]While they no

95 longer deal with governmentsasmasters,theystill do as equals, and it 96 is an equality now clothedinrespectability. , 7 In 1983 sixoil companies 97 – the fi ve US-basedmajors andStandard OilofIndiana – were in the 98 top10ofUSindustrial fi rmsinterms of revenues. In termsofprofi t, 99 in 1972 the fi ve US majorshad made$3.8billion, by and large OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

Counter-Shocked? The Oil Majorsand the Price Slump 79

, 100 Table 4.1 Seven majors control over oil (production and buy-back oil, 101 mb/d) 102 1972 1982 103 Exxon 5.0 3.1 104 Royal Dutch-Shell 4.0 3.8 105 British Petroleum 4.8 2.4 Texaco 3.2 2.0 106 Standard of California 3.2 1.9 107 Mobil 1.9 1.7 108 Gulf 3.2 1.0 109 Total major companies 25.3 15.9 World production 41.3 38.5 110

111 Source: Michael Tanzer and Stephen Zorn, OPEC, sDecade: Has It Made a Difference?, , MERIP Reports xiv/120 (1984), pp. 8 – 11: 9. 112 113 114 one-seventh of all theproﬁ ts of Fortune 500 .By1982 thesame 115 companiesaccounted for $9.1 billioninproﬁ ts, still aboutone-seventh 8 116 of the Fortune group. This impressiveconcentration of wealth and 117 power cannot be dismissed as apassivebystander of such apivotal 118 event as thecounter-shock. My thesisisthatinthe 1980sthe 119 companiestried to regainadegree of control over theworking of the 120 industry,snatchingitaway from OPECand national oilcompanies. 121 They didsomainlyintwo ways:byincreasing production in areas , 122 outside theOPEC domain,thusunderminingOPEC scentrality as a 123 global production centre, andbyfostering anew, wholly unprece- 124 dented (atleast forinternational oil) way of determiningthe priceof

125 crudeand products: themarket. As evidenced by KarlPolanyi,

, , 9 126 theconstitution of a free market implies ahighdegree of artiﬁ ciality.

127 In thecase of theoil industry,the triumph of themarket during

, 128 the1980s,inconsonancewiththe more general ,neo-liberal 129 (counter-)revolution,was only partially relatedtoaspontaneous 130 unleashingofentrepreneurial animal spirits. It wasalso ameans for 131 theWesterncompaniestodisplacethe producingcountries fromthe 132 commanding heightsofthe internationaloil trade. OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

80 Oil Counter-Shock

133 Spatial Restructuring 134 Since the early 1960sthe majors had been alimenting ahuge wave of 135 investments in politically safe areas inside the capitalist world, in regions 136 like the North Sea and Alaska. These investments becameproductive 137 during the 1970s,especiallyafter mid-decade. Even though at the time 138 they accounted for onlyaround 10 per cent of the world oil reserves, 139 Western Europe and the United States soon supplied 27 per cent of total 140 oil output.10 The United Kingdom becamethe fi fth producerinthe 141 world.11 Despite the high costs of development, the companies operating 142 these fi elds realised very good levelofprofi t, thanks to the prevailinghigh 143 prices and weak taxation. Though made more stringent after the 1973– 4 144 price rise, the fi scal regulations in the North Sea fell short from assuringa 145 governmenttakeabove the 80 percent threshold, the desired objective of 146 the Norwegian and UK governments at the time. As calculated by 147 , Øystein Noreng,Norway sgovernmenttakein1980was in the order of 148 , 57– 66 percent. The UK swas not much higher.12 The neoliberal turn 149 and the ascent of supply-sideeconomics further relaxed the fi scal 150 constraintsoncompanies: in 1983the Thatcher administration 151 proceededtoabolish the SupplementaryPetroleumDuty, established 152 fi ve yearsearlier, and the royalty on fi eldsdeveloped after April 1982.13

153 , Overall, in Noreng swords: No, rthSea oilattractssomeofthe highest 154 prices in themarket, andcompany pro ﬁ ts perbarrelproducedare several 155 , timeshigherthancompany pro ﬁ ts on oilboughtfromOPEC scountries

156 state oilcompanies, . 14 As indicatedbyMichael Renner,inthe early 157 1980sthe companiesmadebetween $1 and$3proﬁ tper barrel in the 158 underdeveloped countries as opposedtoa$5to$10 margin in the 159 industrial centres.15 Thus production in thecapitalistworld soared (asdid 160 , Soviet exports) andOPEC sshare of totalproductiondecreased. 161 This expansionofnon-OPEC outputtook place in amomentof 162 receding demand, consequence of various factors, mainly the effects of 163 the energy saving conversion of the advanced economies engendered by 164 the highprice of oil.16 165 OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

Counter-Shocked? The Oil Majorsand the Price Slump 81

, 166 Table 4.2 Crude oil production by world sten leading producers in 167 1984 168 1973 Change 169 (mb/d) 1979 1984 1979– 84 170 Soviet Union 8.7 11.9 12.4 þ 4% 171 United States 11.0 10.1 10.4 þ 3% Saudi Arabia 7.4 9.6 4.7 2 51% 172 Mexico 0.6 1.6 3.0 þ 88% 173 Iran 5.9 3.2 2.5 2 22% 174 United Kingdom 0.0 1.7 2.6 þ 53% 175 China 1.1 2.1 2.3 þ 10% Venezuela 3.5 2.4 1.9 2 21% 176 Canada 2.1 1.8 1.6 2 11% 177 Indonesia 1.3 1.6 1.4 2 13% 178 Opec 30.8 26.9 a 17.9 2 33%

179 a Data from 1980.

, 180 Source: Christopher Flavin, World, Oil: Coping With the Dangers of Success , 181 Worldwatch Paper 66 (July 1985), pp. 5 – 66: 14 and 17. 182 In this situation the private oil companiesand the majors among 183 themacted as the independents did in the 1950s and 1960s, playingas 184 free riders and leaving the task of balancing the marketconditionsto 185 OPEC which on its part was not up to the task. As pointedout by the 186 former OPECSecretary General Fadhil Chalabi in his memoirs 187 published in 2010,OPEC never acted as acartel in the proper sense. 188 189 Table 4.3 OPEC and non-OPEC crude oil production (% of capitalist 190 world total) 191 1973 1976 1979 1980 1981 1982 192 United States 19.9 17.8 17.4 18.8 20.5 24.7 193 North Sea 0.1 1.1 3.9 4.5 5.3 6.3 194 Mexico 1.0 1.8 3.0 4.2 5.5 7.3 Total non-OPEC 33.0 32.6 37.1 41.0 45.9 55.4 195 OPEC 67.0 67.4 62.9 59.0 54.1 44.6 196 Total (mb/d) 48.3 47.5 51.3 48.0 44.4 41.3

197 , Source: Michael Renner, Restructuring, the World Energy Industry ,MERIP 198 Reports xiv/120 (1984), pp. 12– 17 and p. 25: 15. OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

82 Oil Counter-Shock

199 In fact, acartel, and especially one like OPEC enjoying the lowest cost 200 of production in the industry,would have operatedwith aview of 201 defending itsmarket share, crowding outthe mostdangerous 202 competitorsfrom the marketthrough an aggressiveprice policy. 203 OPEC never did so, at least not in asystematic and coherent way. This 204 was for avariety of reasons, not least because OPEC was born with the 205 precise task of defendingthe price level and was thus consubstantially 206 averse to price reductions. In any case, this produced aparadoxical 207 situation, as Chalabide ﬁ nes it, in which the OPEC low-cost producers 208 were forced to cut their output while the high-cost producers of the

209 North increased theirs. Thus OPEC sproduction – 31 mb/d in 1979 –

, 210 was soon reduced, becau, se of its production and pricing policies – as 211 stated by Chalabi – to 15.5 mb/d in 1985 while the output of extra 212 OPEC areas (excluding the United Statesand Soviet Union) kepton 213 rising, jumpingfrom 8.2 mb/d in 1975 to 17.1 mb/d in 1985.17 214 In all evidence OPEC had lost control over production levels and its 215 share of the world oil production was shrinking to the beneﬁ tof 216 producingregionscontrolled by Western companies.18 What is more, 217 OPEC was losing control of price too. 218 219 The Commoditisation of Oil 220 In the Atlantic region,NorthSea oil – whose production was 40 per cent 221 in the handsofthreemajors: BP, Shell and Exxon19 – entered in direct 222 competition with the oil coming from the African members of OPEC 223 (Algeria, Libya and, most of all, Nigeria). As observed by Petroleum 224 Intelligence Weekly ( PIW) – one of the most complete sourcesof 225 , information on the oil trade – OPEC scrude oil price structure was 226 coming understronger pressure from withoutrather than from within. 227 Price leadership was in the handsofUSand NorthSea crude sellers –

228 and, their solution to ashrinking market is to reduce prices rather than

229 , lose volumes, . 20 In this condition, OPEC sonly logical option wastocut 230 production to backupthe ofﬁ cial price at $34 abarrel. 231 OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

Counter-Shocked? The Oil Majorsand the Price Slump 83

232 In theSpringof1983, when OPEC was forced to cutthe price, the

233 Petroleum Economist – an ,industry mouthpiece as Francisco Parra 234 deﬁ nedit 21 – wrote: ,Forthe African light crudeproducers the

235 principalcompetition comesfrom theNorth Sea, andparticularlyfrom 236 theUK., 22 Thepreceding year North Sea production hadreached 2.7 237 mb/d,while Nigeria, Libyaand Algeriahad produced respectively 1.3, 238 1.1and 0.7mb/d. Particularly relevantinthiscontextwas theroleofthe 239 BritishNationalOil Corporation (BNOC), thestate-owned company, 240 created by theLabourgovernment in 1975,thatmarketed 51 percentof 241 theNorthSea crude. In theearly1980sBNOC came to represent a

, , ,

242 ,thorn in OPEC sside – as PIW wrote 23 – sinceitwas ﬁ rmly tied to its

243 major oilcompany customers andits pricingpolicy remained ,highly 244 sensitivetomarket forces, .Atthe beginning of 1983, BNOC,unableto 245 dispose of allits oilatthe ofﬁ cial prices – $33.50 forForties – proposed 246 cutting itsprice to $30.50 effective 1February. Nigeria,withfalling 247 production,ahuge population anddireexternaldebtobligations, was 248 particularly sensitivetothe pricepolicy pursued by theBritish 249 companyand it feltcompelled to follow, reducingits Bonny 378 by as 250 much as $5.50 to $30 perbarrel, whilecorrespondingpricesfor 251 Algerianand Libyan oilwere ﬁ xed at $30.50. 252 253 This – wrote Petroleum Economist – effectively destroyed Saudi , 254 Arabia splan to unify the price structure by lowering the marker 255 to $30, the marker being traditionally $1.50 below Bonny. , 256 It also prompted protests from some of BNOC scustomers that North Sea oil was now over-priced and should be further reduced 257 to $1/bl. This rekindled fears of acut-throat price war [ ... ].24 258 259 ,

Together with the ascent of new sourcesofcrude, OPEC scentrality was

260

, undermined by the commo, ditisation of oil, that is the increasing role of 261 the market mechanisms in the oil pricing. This, as strangeasitmay 262 sound, was big news for the industry. In fact, in the halcyon days of the 263 seven sisters in practicetherewas no such thing as amarket pricefor 264 OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

84 Oil Counter-Shock

, 265 crude oil. The reference price,the poste, dprice ,was determined quite 266 arbitrarily by the companies and was used mainly to establish the level of 267 payments to producers and to transfer the crude withinthe vertically 268 integrated structure of the majors. Each company had itsown sourceof 269 crude supply as well as the capacity to reﬁ ne it. Only atiny fraction of , 270 crude was sold outside the majors circuit.25 The matter was partially , 271 different for product trade, wherethere wasawider margin for arm s 272 length sales, but all in all the volume of spot trade remained limited to a 273 small percentage of the totaloil trade, while the bulk of it, 95 per cent or

274 so, was based on contractsspecifying prices and quantities over long

275 periods of time.26 The spot markets played aresidual role, as a nec, essary 276 evil, for absorbing short-term supply imbalances.27 , 277 During the 1960s,when the majors grip on the oil trade began to 278 loosen, the spot markets gained increasingattention. They were 279 alimented by independent ﬁ rmslooking formarkets fornewly 280 discovered crude (from Libya for instance) and by emerging national 281 oil companies in search of autonomy from the majors.Whenthe majors 282 lost control over oil in the producing countries, the spot trade, alimented 283 by the increasing quantities now in the handsofthe producing 284 governments, shifted from aresidual to amarginal role, that is it became 285 an indicator of overall marketconditions.28 This wasparticularly evident 286 during the second oil shock in 1979, when spot transactions were the 287 driving force behind the price rise. However,despite its signiﬁ cance to , 288 the industry splanning and pricingpolicies,the volume of the spot trade

289 remained relatively small until 1981– 2when it begantogrow at avery

, 290 rapid pace, turning into a major, market . 29 Several factorscontributed to 291 this development. Basically,the oil glut that had emerged soon after 292 the oil shock of 1979– 80 pushed the producers to the spot markets 293 where they tried to get rid of some crude. Furthermore, as OPEC 294 members began to lose their marketshare, they increasingly engaged in 295 spot trade as agood channel to try to recapture lost sales.30 In aweak 296 and slack market, the reﬁ ners were forced to use the most economical 297 way of procuring oil. This brought about ashift from term-contract OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

Counter-Shocked? The Oil Majorsand the Price Slump 85

298 arrangements at fi xed price to spot purchasingofcrude to take advantage 299 of the decliningspot prices. Moreover, independently from market 300 conditions, in the North Sea the growthofthe spot market wasfacilitated 301 by the tax system. As explained by the SelectEnergy Committee of the 302 UK Parliament, in asituation in which the selling of crude between 303 producing and refi ning affi liates of acompany was taxed at the offi cial 304 pricethere was aclear incentive for the affi liates to sell and buy on the 305 spot markets, where the price was lower.31 306 In the beginning the spot sales were the domain of traders and 307 brokers but increasingly the big oil companies found it necessary to 308 adoptmore of atrading stance themselves,and they quickly became 309 inextricably committed to the spot market as amajor source of supply. 310 According to Petroleum Economist of November 1983 between 20 per 311 centand 50 percent of the crude oil supplies of the larger companies 312 camefrom the spot markets, comparedto5– 15 per centprior to the 313 Iranian revolution and perhapsonly1– 2per cent (if that) during the 314 daysofunhindered integration.Asexplained by Frank Niering,

, 315 Petroleum Economist schief commentator about market trends: The, key

316 factor in this expandinginvolvement of the oil industry in the spot 317 market has been the lossofcontrol overpricing of crude oil., 32 318 Soon the spot markets were joined by another new source of oil 319 pricing, the futures market which developed as away to hedgeagainst the 320 instability of oil pricing. The ﬁ rst futurescontracts on petroleum 321 products were introduced in 1974 on the New York Mercantile Exchange 322 but, in aperiod of price stability such as that prevailing between 1974 and 323 1978, they attractedscarce attention and fadedintoobscurity. As the 324 priceofinternational oil becamemore volatile and the US authorities 325 removed price controls on the US market (in 1976, 40 US states removed 326 priceregulationoffuel oil; in February 1981 the Reagan administration 327 completely liberalised petroleum pricing),the second generation of 328 futures, starting with the introductionofheating oil and heavy fuel 329 contracts on NYMEX in November1978, had greater luck.On30March 330 1983crude oil futurescontractsbegan trading at NYMEX and the OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

86 Oil Counter-Shock

331 Chicago Board of Trade. The new contracts quickly turned out to be a 332 great success. They were put together under the guidance of aCrude Oil 333 Advisory Committee chaired by JohnM.Lichtblau,President of the 334 PetroleumIndustry Research Foundation, and composed by representa- 335 tives of oil companies, brokers andtraders.33 336 These developments brought about asensational increase of oil

337 trading. As commented by PIW, in February 1986,inthe midst of the

, 338 price slump: For, oil markets, this is deﬁ nitely the era of the speculator. 34

339 In fact, in 1985 the volume of crude trading had soared 100 per cent in a

, 340 year in the pap, er barrel markets of the North Sea and NYMEX. In that

341 year, in both of those highly visible, trend-setting markets, seven or more

, , , 342 ,paperbarrels changedhands foreach wetbarrel of physical 343 production.35 In NewYork the equivalent of 11 mb/d of Western 344 Texas Intermediate crude was traded in 1985, up 116 per cent on 1984. 345 Actual production of the WTI wasonly about 1.4 mb/d and total US 346 output was 8.9 mb/d. 347 Undoubtedly OPEC was the main loser in this development, not only 348 because in the end it was compelled to accept price levels much lower 349 than those it had tried to defend between1980 and 1985,but most

350 importantly because it lost the powerofsetting the price to the 351 supposedly impersonal workingofthe market: As, longasproducers are

352 unable to enforce astructuredprice system by limiting output, they have 353 little choice but to accept direction from spot prices., 36 354 On the other hand the companies were, at least in the immediate, the 355 main beneﬁ ciaries from the ascendance of the market. There was an 356 evident economic advantage as the majors, after having been cut off from 357 the equity oil of their concessions, were now crude short, so they had , 358 everything to gain by going to abuyers marketwhich the oil trade had 359 turned into soon after the shock of 1979. 360 On amorestructural plane,asaconsequence of the forced 361 downsizingoftheir oil reserves, the companies had inverted the

362 tendency towards vertical integration andwent through aprocessof

, 363 de-, integration ,that put emphasis on the autonomy and proﬁ tability of OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

Counter-Shocked? The Oil Majorsand the Price Slump 87

364 the downstream sector.37 This made them much more marketoriented 365 than in the past and as such better equipped to take advantage of a 366 regime of price ﬂ exibility. Their counterpart on the crude market, the

367 producing governments, were instead much more aversetocrude price

368 instability,preferringto ﬁ xanof ﬁ cial selling price, ac, arbon copy of the

,, , , 369 old , posted price system used by the majors since the early 1950s . 38 As

370 indicated by one of the most penetrating observers of the oil industry,

,, , , 371 JackHartshorn, the, yearning for price administration by cartel 372 organization or other means, tends to align OPEC interests as sellers , ,

373 againstthe new forces form the buyers and traders side that arenow 374 tending to open up the crude market , . 39 375 Mostimportantly,the shift to market-oriented crude pricing 376 naturally curtailed the space of manoeuvre for state-to-state deals, , 377 which by their nature marginalised the companies role and were 378 therefore seen with hostility by them.40 379 Ultimately,the stakeonthe tablewas thecontrol of theoil industry. 380 John E. Treat, thepresident of NYMEX, declared that thecrude contracts

381 wouldbecomeamajorpricing indicatorfor worldoil markets, replacing 382 OPEC as theultimateprice setter: Th, etruevalue of crudeoil will

, ,, ,

383 increasingly be determined by , open outcry rather than behind OPEC s

384 closed doors., 41 Of course this raises thequestion: howmuchneutral were

, 385 thosemarkets?Ido notintendtoaf ﬁ rm that the co, mmoditisationofoil , 386 that is theincreasing role of themarketinthe crudetrade,was theresult of

387 aplotorchestratedbythe companiestothe detriment of OPEC countries.

, 388 This developmentwas largelyaconsequenceofthe oi, lrevolution of the

389 precedingdecadeand in particular of thenew con ﬁ guration of the

, 390 production sector andthe consequent de, -integration of themajors. , 391 In themajors eyes it represented away to access cheapersuppliesofcrude. 392 However, behind theascendance of themarketthere wasnot only 393 objective conditions, butalsothe subjective expectations that it would , 394 represent ameans to reduce OPEC sin ﬂ uence on theoil pricing. The 395 companiesknewfromexperiencethattheycould manipulate the 396 quotations in an allegedlyfreemarket.Inthe 1970sthe investigations OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

88 Oil Counter-Shock

397 carriedout by the Bundskartellamt andbythe Statens pris- och 398 kartellnämnd – respectively theGermanand Swedishanti-trust authorities 399 – hadshowedthatthe quotations on thespotmarket in Rotterdam – the 400 worldmostimportant spot market at thetime – were heavilyin fl uenced, 401 throughvarious means, by themajors.42 Tenyears later, it wasan 402 acknowledgedfactthateventhe more sophisticated futuresmarkets 403 allowedthe traders,especiallythe biggestoneswithaccesstoinformation 404 precludedtoother operators, asubstantial degree of infl uence on pricing 405 (marketpower in theacademicjargon). 43 It is perfectly reasonable to , 406 hypothesise that it wasinthe majors expectationsthatthe market would 407 turn outtobemoremalleable than thestubbornOPECcountries. 408 409 In Defence of Volatile Markets 410 To substantiatethis affi rmation we can refer to some indirect evidenceof 411 ,

companies interest in promoting the rise of the spot markets. In 1979,

412

, the pricestorm unleashed by one of the recurrent oil, fright campaigns 44 413 , and buying panics that had characterised the industry shistory,induced 414 some consuming governments to ponder the establishmentofsome kind 415 of regulatory schemefor spot markets.45 The steep riseofthe price of 416 crude andproducts registered on thesemarkets in fact seemedtoput in 417 jeopardy the mechanisms of price control existinginmostofthe 418 Western European countries (the onlyrelevant exceptions being West 419 Germany and Switzerland where the price of petroleum productswas left 420 free from State interference).46 In response to these worries, in March 421 1979 the EEC Councilofenergy ministers asked for the immediate 422

implementation of amechanism of monitoring of the variousoil-free

423

, markets, notab, ly Rotterdam ,and invited 150 companies to ameeting in 424 Brussels to askthemtoparticipate in an analysis of the Northwest 425 Europeanand Mediterranean spot markets.47 France in particular, 426 backed by Italy, Belgium, Denmark and Ireland, demanded the 427 institution of controls on Rotterdam operations, with the establishment 428 of aprice ceiling for spot transactions on products (not of crude, to avoid 429 OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

Counter-Shocked? The Oil Majorsand the Price Slump 89

430 aclash with OPEC), feeling that the, pricein ﬂ uence of the small oil

431 volume traded in Rotterdam was unacceptable, . 48 These projects were

432 vehemently opposed by oilmen that deﬁ ned them Imp, racticable,

433 unworkable,and probably undesirable., Accordingtoasurvey conducted 434 by PIW,the prevailing opinioninthe industry was that: To, control spot 435 oil sales somehow would likely destroy the vital functionthey perform in 436 smoothing supply and demand imbalancesamong world reﬁ ning areas,

437 individual countries, independent segments of the oil industry and even 438 the far-ﬂ ung operations within each major integrated oil company., 49 439 The chairmanofShell Transport and Trading, C.C. Pocock, declared that

440 allowing the price mechanism to work freely was the key to restore the 441 supply– demand balanceonoil markets: Consu, ming governments must 442 allowhigher pricesto ﬂ ow through to the market and thusdotheir job in 443 regulating demand. [ ... ]Nothing else – no controls on imports, no

444 allocation system, no sticks, no carrots – can take the place of the price

445 mechanism., 50 With amore explicit referencetoprojects of regulationof

446 spot markets, Exxon chairman, C.C. Garvin, bluntly stated: the, only way 447 you regulate aspot market is by not buying, . 51 448 Due to the opposition of the industry,the contrarietyofsome leading 449 EEC members, Germany and Britain in particular, and the calming down 450 of the spot markets, the French ideas were soon shelved.What is , 451 signi fi cant in this story is the oil companies defence of the spot markets, 452 an element that has to be seen in conjunction with awider shift of the 453 companies towards more fl exibility in theiroperations andless 454 commitments in regardboth to consuming and producingcountries. 455 In this same period the majors drastically curtailed, or, as Exxon did, 456 deleted altogether their commitments to third-partysales based on long- 457 term contracts. 52 This move,dictated by the necessity of having suffi cient 458 crude to feed the affi liates, at fi rst was interpreted as having the effect of 459 pushing the third-party buyers towards deals with OPEC members. 460 Actually, especially after the offi cial OPEC price began to be undercut 461 by the declining spot prices, it represented apowerful boost to the 462 development of spot transactionsasanalternative to trade with OPEC. 53 OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

90 Oil Counter-Shock

463 Thus, after nearly doubling between 1977 and1980, the volume of crude 464 sold through state-to-state deals by nine Middle East and African OPEC 465 members fell by asharp 1.6 mb/d in the fi rst half of 1981.After reaching 466 apeak at 7.6 mb/d in 1980,the government-to-government trade , 467 receded to 6million in 1981 and to 5.5 million in 1982. 54 The companies 468 strategy of containmentofdirectdeals betweenproducing and 469 consumingcountries seemed to be working. 470 Signi fi cantly,after thebubbleburst in 1981– 2, with demand continuing , 471 to drop and thepricesbeginning to decrease, theindustry ssupport forthe 472 spot marketsdid notseemtolessen. In effect,while in 1979the majorswere 473 in favour of higherprices becausetheyhad stillaccesstoequityand buy- 474 backoil at prices lowerthanthose prevailing on thespotmarkets,and 475 therefore they gotacompetitiveedge againstthe independents,whenthe 476 marketslackenedaround early1982and petroleum prices started to plunge 477 on thespotmarkets,theyfosteredthe fall by heavily spot-selling thehuge , 478 stockstheyhad amassedinthe precedingyears.Inlight of themajors high 479 level of destocking, SaudiArabian Oil ministerAhmed Zaki Yamani 480 accusedthemand theInternational Energy Agency of conspiring against 481 thesmallercompanies andOPEC: 482 483 Theoil companiesdonot have an immediate interest in lowering 484 theprice of oilbecause this wouldimmediatelydevalue theirasset. 485 However, take themajors – thesehugegiant entities – andcompare 486 them to thesmall independent companies. Some of thosesmall companieshave alreadygonebankrupt. If we reduce theprice to 487 somethinglike$28,immediately many more will go bankrupt,and 488 they will be swallowedbythe sharks.[Themajors] will take andgain 489 somethingwhile they arelosingsomething on theother side. 55 490 491 Actually,inthe fi rst phase of the price decline, when the fall wasgradual 492 and suffi ciently slow,the majors did quite well, the fallingpricescutting , , 493 more into producer states revenuesthan companies profi ts.56 The 494 reasons of this development were explained by the prominentoil analyst 495 Paul Frankel: OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

Counter-Shocked? The Oil Majorsand the Price Slump 91

, 496 The loss of pro ﬁ tability ,upstream [i.e. in theproduction of

497 crude]resultingfromlow (and lowering) crude oil prices is to

, 498 some extent balancedbybetter margins ,downstream ,in reﬁ ning andmarketing. Although productprices have to follow 499 downwards thoseofcrude oil,theytend not to do so fullyand 500 thereisaninevitabletime lagwhich tendstoovercompensate 501 thebook lossesonstocksofcrudeoil acquired at higher 502 prices. 57 503 504 Furthermore, as pointed out also by Yamani, the price slump made it 505 possible for some of the largest and cash-rich companiestoacquire on 506 favourable terms the assets, and the marketshare, of smaller, awkwardly 507 positioned competitors.And in effect the 1980s had been an era of

508 mergers and acquisitions in an unprecedented scale for the oil industry. 58 509 As concluded by Frankel: The, leaders of the stronger companiesmay 510 thus ﬁ nd it possible to considercurrent drawbacks as being acceptable 511 since they believe, perhaps rightly, that in the nextround asmaller

512 competitive ﬁ eld, consisting of fewerand leaner companies,may herald 513 the returntoamore manageable situation., 59 Furthermore, this new 514 world of leaner and meaner companies tookavery different look at price , 515 ﬂ uctuations than the one prevailinginthe industry spast, when price

516 instability was seen as the utmost danger.Now, as evidenced by the 517 Petroleum Economist, the, modern trading-oriented oil company may 518 well argue that volatile markets areanopportunity for the smart trader to

519 makemoney, and the old long-term planning bases areahopelessly out- 520 of-date concept, . 60 521 When, in early 1986,the oil price nose-dived, dangerously nearing 522 the $10 level,the outlook changed for the majors. Atoo depressed price 523 levelwould have put in jeopardy the long-term proﬁ tability of the high- 524 cost operations of the North Sea and Alaska.61 The new gloves-off policy 525 followed by the Saudis, determined to recover their marketshare by 526 pricing away competitors, was too hard to sustain for the companies. 527 These worries explain the mission of Vice President Bush to Saudi 528 Arabia, in April 1986,much more than an improbable insubordination OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

92 Oil Counter-Shock

529 of the until then rather anonymousvice president againstthe free market 530 stance of the administration.62 531 In conclusion,the counter-shock, far from being merely the result of 532 the avidity of the OPEC countries and of their incapacity to cope with the 533 new realities of the oil markets, has to be viewed in the context of an 534 ongoing struggle for the control of the oil trade between OPEC and the 535 big oil companies.Inearly 1988 OPEC oil sales at ofﬁ cial prices had 536 virtually disappeared, accounting for barely300,000 b/d of atotal of 13.7 537 mb/d of exports. All the other sales were made at pricesrelated to the 538 market quotation of Brent, for Europe, and of WTI for the United 539 States.63 The ascendance of amarket-driven oil trade had effectively , 540 shatteredOPEC srole as aprice setter.64 In this perspective, the price , , 541 collapse can be seen as the Frankenstein screature of the companies 542 efforts of establishing an alternative to OPEC power through the market: 543 the game went out of control. But in retrospect, the price wasworth 544 paying: the oil price plunge marked the end of the OPEC decade. 545

546 Notes

, 547 1. Morris Adelman, The, Clumsy Cartel , The Energy Journal i/1 (1980), 548 pp. 43– 53. 2. Ian Skeet, OPEC: Twenty-Five Years of Price and Politics (Cambridge, UK, 549 1988), pp. 191– 3. 550 3. The clearest example of this narrative can be found in Daniel Yergin,

551 The Prize: The Epic Quest for Oil, Money, and Power (New York, 1991),

, chapter 35, entitled Just, Another Commodity? .Here the big oil companies 552 are presented as spectators of ashow carried out by the OPEC countries and 553 impersonal market forces. 554 4. Five were American: Exxon (formerly Standard Oil of New Jersey), Standard Oil of California (Chevron), Mobil (formerly Standard Oil of New York), 555 Gulf and Texaco; one was British, British Petroleum, and one Anglo-Dutch, 556 Royal-Dutch-Shell. The best primer to the history of the seven sisters and of the international oil industry till the 1970s is Anthony Sampson, The Seven 557 Sisters (Seven Oaks, 1975). 558 5. The most insightful analysis of the basic features of the oil industry under the , 559 majors dominancecan be found in EdithT.Penrose, TheLarge International Firm in Developing Countries (London, 1968). 560 6. The expression is taken from Steven A. Schneider, The Oil Price Revolution 561 (Baltimore, 1983). OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

Counter-Shocked? The Oil Majorsand the Price Slump 93

562 7. Frank Kearton, The, Oil Industry. Some Personal Recollections and Opinions, ,inD.Hawdon (ed.), The Changing Structure of Oil Industry 563 (Beckenham, 1985), pp. 1 – 17: 16 and 17.

564 8. Michael Tanzer and Stephen Zorn, OPEC, sDecade: Has It Made a 565 Difference?, , MERIP Reports xiv/120 (1984), pp. 8 – 11: 9. 9. Karl Polanyi, The Great Transformation: The Political and Economic Origins 566 of Our Time (Boston, 2001) [ The Origins of Our Time: The Great

567 Transformation (New York, 1944)], p. 145 and ff.

, 568 10. Michael Renner, Restructuring, the World Energy Industry , MERIP Reports xiv/120 (1984), pp. 12– 17 and 25: 14.

569 , 11. Non-OPEC, Output Plays Still Bigger World Supply Role , Petroleum 570 Intelligence Weekly ( PIW), 7January 1985, p. 7. 571 12. Øystein Noreng, The Oil Industry and Government Strategy in the North Sea (London, 1980), p. 176. The government take in the Persian Gulf was beyond 572 80 per cent already in 1970. See Morris Adelman, Genie Out of the Bottle. 573 World Oil Since 1970 (Boston, 1995), p. 56. 13. Carole Nakhle, Petroleum Taxation. Sharing the Oil Wealth: AStudy of 574 Petroleum Taxation Yesterday, Today and Tomorrow (London, 2008), p. 55.

575 14. Noreng, The Oil Industry,p.24.

, 576 15. Renner, Restructuring, ,p.15. 16. Leonardo Maugeri, The Age of Oil (Westport, 2006), pp. 133– 4. 577 17. Data from Fadhil Chalabi, Oil Policies, Oil Myths. Observations of an OPEC

578 Insider (London, 2010), p. 242.

, 579 18. Donald O. Croll, OPEC, sshare continues to Decline , Petroleum Economist (PE) (September 1982), pp. 357– 8.

580 ,

19. Renner, Restructuring, ,p.14.

, 581 20. US, and North Sea Prices Squeeze OPEC $34 Base , PIW,15February 1982, 582 pp. 3 – 4. 21. Francisco Parra, Oil Politics. AModern History of Petroleum (London, 2004),

583 p. 116.

584 22. Is, There aFuture for OPEC? , Petroleum Economist (January 1983), p. 118.

23. UK, PriceRiseWould Give ImmediateSupport , PIW ,31May 1982,pp. 1 – 2.

585

, 24. Is, There aFuture for OPEC? , Petroleum Economist (April 1983), p. 118. 586 25. On the structure of the oil industry at the middle of the 20th century Jack 587 E. Hartshorn, Oil Companies and Governments: An Account of the International Oil Industry in its Political Environment (London, 1962) 588 remains unsurpassed: on crude pricing see pp. 130– 51. For apithy and clear 589 overview of the evolution of the oil pricing: Salvatore Carollo, Understanding 590 Oil Prices (Chichester, 2012), pp. 29– 44. 26. Hossein Razavi and Fereidun Fesharaki, Fundamentals of Petroleum Trading

591 (Santa Barbara,1991), p. 6.

, 592 27. Oil, Markets Reconsidered – 1984 and Beyond , PIW,Special Supplement, 593 22 April 1985, pp. 1 – 12. 28. Razavi and Fesharaki, Fundamentals of Petroleum Trading,p.6. 594 OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

94 Oil Counter-Shock

595 29. Ibid., p. 7.

, , 30. Rethinking, Britain sRole in World Oil Markets , PIW,18March 1985, 596 pp. 7 – 8.

597 31. Ibid.

, 598 32. Frank Niering Jr, Market, Trends , Petroleum Economist (October 1983), pp. 443– 4. 599 33. Special Petroleum Economist Report, Oil Futures Trading, Petroleum 600 Economist (June 1983), pp. 223– 30: 226. In November 1983 another futures

601 market (the International Petroleum Exchange) opened in London.

,,, , , 34. Oil, Firms Hedging More Trades With Paper Barrels , PIW,3February 602 1986, p. 2.

603 35. Ibid.

, 604 36. Market, Barometers Gain Importance As Ofﬁ cial Prices Falter , PIW,

6January 1986, p. 3.

, 605 37. T.D. Ross, Th, eStatusand Strategies of theInternational OilCorporations ,in 606 J. Rees andP.Odell (eds), TheInternational OilIndustry (Basingstoke,1987), , pp.67 – 75.Rosswas aformerexecutive of Shell International. Thecompanies 607

strategy changeddrastically in theeconomicand politicalclimate of the1990s:

608 Joseph Stanislawand Daniel Yergin, Th, eReintegration Impulse: TheOil 609 Industry in the1990s, ,Cambridge Energy Research Associates Report (1987). 38. Parra, Oil Politics,p.318. 610 39. Jack E. Hartshorn, Government Sellers in aRe-Structured Crude Oil Market,

611 in Hawdon (ed.), Changing Structure,pp. 59– 69: 67.

612 40. See, for example, David Steel s(the chairman of BP) critique of the rigidity,

, , and inef, ﬁ ciency of government-to-government deals in his Address to

613 International Association of Energy Economists, ,23June 1980. 614 41. Special Petroleum Economist Report, Oil Futures Trading,p.226.

615 42. Memorandum by C. G osta~ Malmstrom~ (Statens pris- och kartellnämnd),

, The, Rotterdam Quotations for Oil Products (1974), Library of the Oxford

616 Institute for Energy Studies, Oxford.

617 43. RonaldAnderson, The, Industrial Organization of FuturesMarkets: ASurvey, ,inR.Anderson (ed.), The Industrial Organization of Futures 618 Markets (Lanham, 1984), pp. 1 – 33. 619 44. Robert Sherill, The Oil Follies of 1970– 1980: How the Petroleum Industry

620 Stole the Show (and Much More Besides) (New York, 1983).

, 45. Rise, in Spot Prices in Europe Draws Growing Criticism , PIW,12February

621

1979, p. 4.

, 622 46. Steep, Spot Prices Not Recoverable in Most of Europe , PIW,19February

623 1979, pp. 6 – 7.

, 47. EEC, Invites Wide Participation in Market Price Check , PIW,23April 1989,

624 p. 7.

625 48. Spot, Markets Effects Worry Members of IEA and Euromart , PIW,14May

626 1979, p. 3; France, Will Press for EEC Control of Rotterdam Market , PIW,

, 28 May 1979, p. 7; Total, Commitment by Consumers Seen Key to Price Lid , 627 OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

Counter-Shocked? The Oil Majorsand the Price Slump 95

628 PIW,11June 1979, pp. 3 – 4; EEC, Seeks Accord Among Members on Spot

Price Issue, , PIW,18June 1979, pp. 3 – 4.

629

, 49. Oilmen, See Control of Spot Trading as Counterproductive , PIW,28May

630 1979, p. 8.

, 631 50. Price, is sole Key to Supply– Demand Balance, Shell Says , PIW,25June

1979, p. 5.

632 , , 51. Don, tBuy is How to Regulate Spot Markets, Says Exxon , PIW,25June

633 1979, p. 6.

, 634 52. Decline, Accelerates in Majors Role as World Oil Sellers , PIW,19March 1979, pp. 1 – 3.

635 , 53. Swing, Away from Term Oil Contracts Gains Momentum , PIW,5April

636 1982, pp. 1and 7 – 8.

, 637 54. State-to, State Deals Lose Appeal as Oil Glut Grows , PIW,8February 1982,

pp. 3 – 4.

, 638 55. Special Supplement, Yamani, Explains Saudi and OPEC Output Strategy , 639 PIW,29March 1982, pp. 2 – 3. , 56. For example, the data on US majors proﬁ tability in 1984 and 1985 showed 640 that, with the exception of Texaco, their net earnings were in retreat, but in 641 many instances this was the consequence of occasional circumstances: for 642 instance Exxon suffered the adverse consequences of alawsuit that condemned it to pay more than $2 billion to the Department of Energy, but

643 , In, fact Exxon soperating earnings from oil and gas were higher both at

, 644 home and abroad, .Mobil searnings were heavily affected by the cost of 645 restructuring its Montgomery Ward department store chain, yet, for Mobil too the earnings from oil and gas were higher than previous years. 646 Furthermore, in the fourth quarter of 1985, when prices started to plunge , 647 vertically, companies earnings registered asharp recovery. Colder weather 648 boosted demand, product margins improved, and increased production volumes more than offset the effect of lower crude prices. Exxon was

649 reported to say that its downstream operation enjoyed one of the best

650 quarters for years. See Donald Croll, US, Oil Companies – Earnings Down

Again Last Year, , Petroleum Economist (March 1986), pp. 81– 2; Donald

651

, Croll, Oil, Companies – The Majors Adjust to Price Cuts , Petroleum

652 Economist (June 1986), pp. 201– 2.

, 653 57. Paul H. Frankel, Where, We Are Going , Topical Problems (Mid July 1986), p. v. Since the late 1970s the companies had been thoroughly restructuring 654 their downstream operations, by shutting down or selling out unprofi table 655 plants, especially in Europe, and by redesigning the production process in 656 order to get in the fi nal output agreater proportion of light products, traditionally more profi table and whose demand was still holding. See

657

Martin Quinlan, World, Survey – Reﬁ neries – Gathering Pace of Plant 658 Closures, , Petroleum Economist (October 1983), pp. 373– 6. 659 58. In this regard, the major event was in May 1984 the acquisition of Gulf, one of the seven sisters, by another major, Chevron for $13 billion. Many other 660 OCS Chapter4— 1/2/2018— NANDHINI.P— 571964— IBTauris

96 Oil Counter-Shock

661 instances can be cited. For example, in 1979, Shell acquired Belridge, a California oil producer, paying atotal of $3.6 billion, in what was the largest 662 corporate acquisition up to that point. In 1981 Conoco was acquired by 663 DuPont for $7.5 billion. In 1984 Mobil, after having tried in vain to buy 664 Marathon Oil, acquired Superior Oil for $5.5 billion. In the meantime Marathon went to US Steel for $6.2 billion. Cities Service and Occidental 665 combined at $4.1 billion. In December 1985 Petroﬁ na acquired Charter- 666 house Petroleum. In the North Sea, after the price slump of 1982, several of

667 the smaller independents were absorbed by the larger ﬁ rms. See Dillard

, Spriggs, The, Restructuring of the US Oil Industry , Energy Papers,SAIS-

668 Johns Hopkins University (July 1985), p. 1; Yergin, The Prize,p.729; Donald

, 669 Croll, London, Mixed, New York up in 1985 , Petroleum Economist

670 (February 1986), pp. 43– 4.

, 59. Frankel, Where, We Are Going .According to astudy by First Boston 671 Corporation the top 25 oil companies that existed in 1980 shrunk to 14 by 672 1988, as some nine companies were swallowed up by acquisitions. Smaller ﬁ rms had arate of attrition even greater: the number of large independent oil 673

companies dwindled from 62 in 1979 to 19 in 1988 (Cyrus Tahmassebi,

674 Structural, Change, Market Concentration and Vertical Integration: Would 675 They Lead to More Stable Markets?, ,paper presented at the 8th International Symposium on Petroleum Economics,Quebec, 13– 15 September 1989,

676

pp. 3 – 4).

, 677 60. PeterLymbery, Ma, rket Trends , PetroleumEconomist (June1986),pp. 235 – 6.

678 61. Industry sources indicated that economic hardships on operating companies would become intolerable at prices below $15 abarrel ( Price, War

679 Vulnerability: Who Feels First Pinch, , PIW,10February 1986, p. 6). As a 680 consequence of the fall of price, the companies operating in the North Sea 681 started to forcefully demand arevision of the tax system, particularly asharp

cut in UK Petroleum Revenue Tax; the abolition of royalties; the easing of the

682 ring, fence rules that limited the possibilities of charging expenditures

683 against ﬁ eld revenue. See Martin Quinlan, Companies, Press for Urgent

Action, , Petroleum Economist (June 1986), pp. 205– 7; Alexander Kemp,

684

, Scope, for Tax Changes , Petroleum Economist (August 1986), pp. 289– 90. 685 62. This is, for instance, the interpretation by Eric Laurent, La face cachée du

686 pétrole (Paris, 2006), pp. 215– 21.

, 63. New, Techniques Now dominates OPEC Crude Pricing , PIW,4April 1988, 687 p. 4.

688 64. As commented by Carollo, maybe with adegree of hyperbole, in 1988 OPEC

,committed suicide (Carollo, Understanding,p.42).For adifferent

689 , , interpretation, stressing OPEC Smaintenance of a very, real degree of 690 inﬂ uence on the pricing of crude: Parra, Oil Politics,pp. 321– 2. 691 692 693 OCS Part_2— 1/2/2018— NANDHINI.P— 571965— IBTauris

1 2 3 4 5 6 PART II 7 8 THE PRODUCERS: OPEC 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 OCS Part_2— 1/2/2018— NANDHINI.P— 571965— IBTauris

34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

1 2 3 4 5 6 5 7 8 9 10 SaudiArabia andthe Counter-Shock 11 of 1986 12 13 14 Majid Al-Moneef 15 16 Introduction 17 18 The oil price collapse of 1986 could well be considered as the third most 19 important event is the history of OPEC and the oil market, the other two 20 being its foundationin1960 and its assumption of the role of price 21 settingin1974. It also markedamajor turning point in oilmarket 22 managementfrom a ﬁ xed oil price regime which characterised agood 23 part of the twentieth century to amarket determined price that lasted 24 untilthe endofthe twentiethcenturyand beyond.Itfurther , 25 demonstrated OPEC sresilience and ability to adapttonew market 26 realities and to rede ﬁ ne its role, thuscontributing to its endurance. 27 Furthermore, the few years leading to the price counter-shock of 1986, 28 the conduct of the pricewar during that year and its aftermath signalleda 29 new pattern of relationship betweenSaudi Arabia and OPEC. 30 Needless to say, oil markets and pricesare usually characterised by 31 repeated demand and supply shocks, due to the resource characteristics, 32 the structure of its industry and the economicand geopolitical relations 33 surrounding itsproduction and commercialisation. However, the oil OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

100 Oil Counter-Shock

34 price shockof1973– 4and the counter-shock of 1986 resulted in new 35 dynamicsleading new equilibrium,new relations and political as well 36 as economicadjustments by the industry,the governments and the 37 marketplace.These twoprice episodes,unlikenumerousothers 38 emanating from frequent supply surges or interruptions or demand 39 dynamics, led to dramatic markettransformation, new political and 40 development choicesofmany producing countries, and changes in the 41 geopolitical scene especially in the Middle East. 42 It was the culmination of the post-World War II oil demand and 43 supply relations and the rise of nationalism over resources in the 44 producingcountries which contributed to the price shockof1973– 4and , 45 to OPEC smarket power. The market organisation of the international 46 oil majors came under pressuresfrom withinand from the new forcesof 47 nationalism and the emerging independentoil producers. By keeping 48 prices depressed at $1.8 per barrel in nominal terms and $15 per barrel in 49 real terms for an extended period of three decades after World War II 50 amid rising global demand and producing governments dissatisfaction 51 with the fi scal and pricing arrangements of the original concession 52 agreements, the market organisationseemed unsustainable. Likewise, it 53 was the culmination of the supply and demand responses to the oil price , 54 shock of the seventies, OPEC smarket management and disarray during 55 its ascendance and the geopolitical and global economicrelations of the 56 eighties that led to the price counter-shock of 1986. 57 58 Prelude to the Counter-Shock 59 The 1973– 4price shock resulted in new oil price levels and new control 60 arrangements over supply. OPEC membercountries seized control of the 61 production decisions from the operating international oil companies, 62 and OPEC opted to set a fi xed price for its marker which was Saudi 63 , Arabia sArabian Light, and fi xdifferentials for all its other tradedcrudes 64 against the markerprice. The decisions on production volumes were left 65 to OPEC in order to clear the market. The level of the marker priceas 66 OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

Saudi Arabia and the Counter-Shock of 1986 101

67 well as its differentials vis-à-vis the other Offi cial SellingPrices (OSPs) 68 turned out to be contentious issues within OPEC throughout the , 69 seventies and into the eighties. Saudi Arabia sviews on theseissues were 70 critical since it wasthe largest producerentrustedwith defending the 71 marker price itself, and was itself producing and exporting to the 72 different markets differenttypes of crudes besides its markercrude. , 73 OPEC sprice setting role from the outset was perceived as abargain 74 between what came to be known as the price hawks led by Iran under 75 the Shah (oftenalignedwith Algeria and others) and price moderates 76 led by Saudi Arabia (often aligned with the other Gulfmembers of the 77 organisations, except Iraq). 78 However, the magnitude of the price increase of the seventies 79 (fourfold) and the accompanying supply arrangements, led to global 80 structural demand and supply changes. First there was the expected 81 consumer demandreaction to the price change and the resulting 82 economic slowdown.Then,more profoundly was the OECD govern- 83 ment responses, partially driven by resentment to the notion that 84 governments from developingcountries rather than the companiesfrom 85 the industrialisedcountries were entrustedwith supplying morethan 86 half of the oil needs of the advanced world. This was manifested in 87 different directions, rangingfrom policiesand programmestopromote 88 and enforce effi ciency measures, diversifyingenergy sources and oil 89 supplies, building strategic petroleum stocks, establishing the IEA to rival 90 OPEC and host of other responses.1 This ultimately led to adeclining 91 OECD oil intensity (and with it energy intensity), measured as oil per 92 unit of GDP, from an average two barrels during the seventies to 93 1.3 barrel per 1,000 dollar GDP (in constantterms) in 1985.The long 94 positiverelation betweenGDP and oil demandgrowthrates were , 95 decoupled in most OECD countries economies, the fi rst growing by an 96 average 2per cent for the group and the latter decelerating by an average 97 3per cent annually between 1979 and 1985.Globally, oil demandwas 98 declining by an annual average of 0.8 per cent from 64 mb/d to 59 mb/d 99 in thesetwo years, agood part of which was demanddestruction in the OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

102 Oil Counter-Shock

100 power sector, permanently displacing fuel oil for gas, nuclear and coal. 101 On the supply side, non-OPEC supply increased by 6mb/d, half of which 102 from Mexico and the UnitedKingdom.This ultimately resulted in a 103 decline of OPEC production by more than 10 mb/d absorbingthe 104 demand drop and non-OPEC production increases during the period. 2 105 While it wasclear that the demand and supply responses starting in 106 the mid-seventies were structural in nature and long in duration, OPEC 107 seemed over confi dent in itsmarketpower, either not realising the 108 impact of the new price on demandand supply, or not being able to 109 separate the economicand the political needs for high prices on the one 110 hand and the sustainability of suchprices and the marketresponses to 111 them on the other.Inits price setting role mentioned earlier, it opted to 112 incorporateinto its price structure the crisis-driven prices resulting from 113 panic buying mostly for commercialand strategic stocking during the 114 few months leadingtothe Iranian revolutioninearly 1979 and the 115 supply interruptions of the Iran– Iraq war ayear later. 116 The end of the supply crises of 1979 – 80 and the ample commercial 117 and strategic stocks built during the crisis, coincidedwith accelerated 118 demand decline in response either to pricesortothe maturationofthe 119 effi ciency measures and programmes.Within the OECD oil demand 120 declined from an average 40 mb/d during 1973– 9toanaverage 34 mb/d 121 in 1985,and the forward demand coverofthe combined commercialand 122 strategic stocks increased from 73 to 101 daysofconsumption. In such 123 environment, OPEC continued to defendthe high prices in face of fi erce 124 competition from the new production of the North Sea, Mexico and 125 elsewhere, that was not bound by OPEC set price levels or differentials. 126 The early eightiessaw increasingspot sales at favourable pricesfor the 127 short-haul crude (i.e.closer to the consuming markets) versus the 128 predominantly term sales at higher OSPs of relatively long-haul supplies

, , 129 from OPEC, especiallyits Middle East members. In this buy, er smarket , 130 spot sales grew from less than 2per cent of globallytradedoil to more 131 than 30 per cent in the mid-1980s, and this was not conﬁ ned to non- 132 OPEC producers. Some OPEC membercountriesentered the fray, most OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

Saudi Arabia and the Counter-Shock of 1986 103

133 notably the African members and Venezuela, responding to the 134 competition from the North Sea in Europe for the former and from 135 Mexico in the United Statesfor the latter, as well as from Iran to increase 136 its market share.

137 The role of Saudi Arabia during this period was critical.Although by

, 138 deﬁ nition OPEC wasthe resid, ual oil producer providing the difference

139 between world oil demand and non-OPEC supply, Saudi Arabia acted

, 140 during 1982– 5asthe swing, producer of the group, that is of providing 141 the difference between world oil demand on the one hand and non- 142 OPEC supply as well as the rest of OPEC supply on the other. In aperiod 143 of decliningOPEC production, the swing producerwould absorb the , 144 brunt of OPEC ssupply adjustment, which amountedtotwo-thirdsof , , , 145 OPEC sproduction decline, compared to Saudi Arabia sshare of OPEC s 146 production of one-third at the end of 1985.Toput this in perspective: , 147 OPEC sproduction declined by 42 per cent from 26 mb/d in 1980 to 148 15 mb/d in 1985, while that of Saudi Arabia declined by 68 per cent, from 149 10 mb/d to 3.2 mb/d during the period,reaching alow of 2.8 mb/d in , 150 July 1985.The decline in oil revenues was as asymmetrical: OPEC s , 151 declining by 48 per centwhile Saudi Arabia sby75per cent between the , 152 two years. The contribution of Saudi Arabia to OPEC sproduction and 153 revenue decline of 8.8 and 16 per cent during the fi ve-year period were 154 70 and 60 percent respectively. The Saudi production decline (and to a 155 lesserextent the other GulfmembersofOPEC)was due to the adherence 156 to the fi xed offi cial prices, prompting buyers to turn to discounted crude 157 from elsewhere reserving the Saudi crude (and generallythat of the Gulf) 158 to balance their supply requirements.3 159 It is unclearwhy Saudi Arabia willingly accepted to shoulder such 160 burden and consequently losing market share and leverage in OPEC.

161 Oneexplanation is itslong-standing opposition to production

, 162 ,programming envisioned andchampionedbyVenezuela since , 163 OPEC sinception in 1960.When OPEC was forcedin1982 to consider 164 pro-rationingamid the marketglut, it adopted during its extraordinary 165 meetingonMarch 20 of that year for the ﬁ rst time a17.5mb/d ceiling OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

104 Oil Counter-Shock

166 and production quotas, maintaining the ﬁ xed ofﬁ cialprice of $34 per 167 barrel. Saudi Arabia refused to be assignedaquota in the overall ceiling 168 on the ground that production is asovereign decision. Instead it 169 announced unilaterally its self-imposed production of 7mb/d,lower 170 than the calculatedquota of 7.5 mb/d. It reiterated this further at the 171 March 1983 OPEC meeting,when no quota was assigned to it under the

172 same ceiling (butalower markerprice was established at $29 per barrel),

, 173 implicitly agreeing to balance the mar, ket requirements for OPEC crude. 174 However, such requirements were at the time lower than the ceiling, 175 meaning that its production would be less than both the self-imposed 176 7mb/d and the later quota of 5mb/d. Production would actually be 4.5, 177 4.1 and 3.2 mb/d respectively in the 1983– 5period. 4 , 178 The other reason of Saudi Arabia sbehaviour might have been its 179 conviction that the demandand non-OPECproduction changes and the 180 pressuresonthe ﬁ xed price regime of the early eighties were of short- 181 term nature and the market might soon be reversed in the mediumto 182 long term. Saudi Oil ministerAhmed Zaki Yamanikept on asserting 183 during 1982– 5that all it would take to balancethe market was to rein in 184 production in order to soak up the accumulated stock overhang, keeping ,

185 the price structure intact.5 Despite his assertions, OPEC sceiling and

186 production continued to decline, and so did the perceived fut, ure call on 187 OPEC oil, putting further pressure on the offi cial oil prices, forcing 188 OPEC to adjust it downward by $6 during the period. This price 189 decline did not impact the patternofdeclining demand especially in 190 OECD nor the increasing non-OPEC supply, the fi rst actually declining 191 by 1.7 per cent annually and the second increasingby2.5 per cent 192 annually during 1980– 5. 193 As it turned out, the oil demandand supply changes where structural 194 in nature and the fi xed price regime wasinappropriate in face of the 195 diversifi ed supply. Not only non-OPEC production was soldatdiscount 196 to the offi cial OPEC prices, but the latter was compromised by OPEC 197 members as well, whooptedtogrant discounts of all kinds off the offi cial 198 prices. Saudi Arabia, being the home of the OPEC agreedmarker price OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

Saudi Arabia and the Counter-Shock of 1986 105

199 felt obliged to stick to it and accept the decliningdemandfor its oil, at the 200 timewhen the others did not abide by the agreed differentials vis-à-vis 201 the marker nor by the agreed quotas. Moreover, the ongoing Iran– Iraq 202 war, the tensepolitical relations between Saudi Arabia and Iran and the 203 intensity of the competition between the North Sea and Nigerian oil, 204 made the prospectsofreaching any meaningful compromise within 205 OPEC the more difﬁ cult.One would argue that OPEC cartel behaviour 206 wasfacing external as well as internal pressures, that ultimately 207 undermined its ability to manage the market in times of glut. 208 209 The Price War of 1986 210 The market pressures were immense, OPEC had lost its commanding 211 , share in the market, its obituaries were common and Saudi Arabia s 212 , balancing act could not effectively keep the organisation srole, nor 213 , its inﬂ uence withinit. By August 1985,Saudi Arabia sproduction at 214 2.2 mb/d and exports at 1.4 mb/d had reachedtheir 1960slevels, so had 215 , those of OPEC sproduction and exports. Thedeclining Saudi 216 production impacted its leverage in OPEC,aswell as its revenues and 217 growth potentials. The situation was so critical that the future of the 218 petrochemical sector, considered then the backbone of the Saudi 219 industrialisation strategy and relying mainly on the associated gas from 220 the production of crude, becamequestionable. All this brought home the 221 consequences of an otherwise international aspect of the petroleum 222 policy of Saudi Arabia that remained uncontested locally for some 25 223 years under the leadership of atechnocrat who enjoyed until then the 224 political backing of three kings. 225 The mountingdomestic pressures, and the seemingly ineffective 226 production and pricingpolicies,prompted Saudi Arabia to change its 227 market strategyand relation with OPEC. The instrument chosen to 228

regain its market share from fellow OPECmembersaswell as non-OPEC

229

, was netback, pricing. The intention wastoinduce buyers to prefer Saudi 230 crude by linking the FOB (free on board) prices of its crude types to their 231 OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

106 Oil Counter-Shock

232 CIF(cost insuranceand freight) productprice realisation, thus 233 abandoning the defenceofof fi cial prices. This enabled the transfer of 234 the price risk from the buyer to the seller, who absorbs the risks 235 associated with product price movements, transportation and the time 236 dimension between selling and refi ning the crude and marketing 237 its products. Historically, the netbackpricingwas used as form of 238 transfer pricing in transactions between the affi liates of integrated oil , 239 companies and among them prior to OPEC stakingcontrol of pricing at 240 the end of 1973.For example, in 1950,Gulf and Shell entered into , 241 netback arrangement which lasted for 25 years for half of Gulf sKuwait 242 production. Netbackswere used then as an accounting or tax reference 243 or evading mechanism to the companiesand affi liates as well as an 244 analytical tool to academicsand experts. 245 By contrast, Saudi Arabia resorted to it as ameans to marketits crude 246 in times of glut, by linking the priceofabarrel of its crude exports of 247 different qualities to the gross product worth of the refi ned products 248 from each crude weighted by its refi ning yield in atypical refi nery minus 249 the transportation cost to the refi ning centre as well as the costs of 250 refi ning it and an agreedmargin to the refi nery. Unlike the netbacks 251 within the company affi liates or the inter-company transactions, , 252 this pricing mechanism is executed through arm slength contracts 253 negotiatedbetween the agency (or company) of the producing country 254 and the buyer, involving all the parameters above, i.e. transportation and 255 refi ning costs, yields, the time lag between the loading of the crude and its 256 refi ning and itsultimate marketing in order to turn long-haul crude into 257 short-haul, the products price reference (usually platts),the payment 258 arrangements as well as the refi ning margin.6 259 The negotiation on each parameter involved many tradeoffs for both 260 the buyer and the seller as well as expectation of their realised values. The 261 main thrust of the seller is to marketthe crude by assuming all the risks 262 associated with the transferofthe barrel of crude to the refi ning centre 263 for its ultimate sale as products, plusguaranteeing amargin to the buyer. 264 This meant that the risk of price fl uctuationisshifted from the buyer to OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

Saudi Arabia and the Counter-Shock of 1986 107

265 the seller who would dispose of the crude not knowing the price that it 266 mightfetch while the buyer is guaranteedanagreedmargin whatever the 267 crude price resulting from the formula negotiated; or even higher actual 268 margin if the deemed values of the parametersended up morefavourable 269 than those agreed in the contract.7 270 Aside from the technical features of netbackpricing, its main aim was 271 to make the Saudi crude, until then sold at offi cially set fi xed prices, more 272 attractive in those distantmarkets in which it had lost its share in Europe 273 and NorthAmerica, where short-haul crude was available at lower spot 274 or discounted prices from within (Mexico, Alaska andthe North Sea) or 275 from nearby producing areas (westand north Africa). Because it was 276 the fi rst to initiate this approach, Saudi Arabia was able to regain its 277 market share and almost double its production in afew months, getting 278 a$27.7 price from its Arabian Light Crude in the secondhalf of 1985, 279 which was slightly lower than the $28 offi cial price then.When other 280 OPEC producers entered into the competitive fray using similar netback 281 pricing methods, the buyers had the upper hand when negotiating such 282 deals, thus undermining the competitiveedge of netback pricing. And

283 when OPEC took adecision uponthe Saudi urging and earlier market 284 positioning,inits December1985 meeting,to secure, and defend for 285 OPEC afairshare in the world oil marketconsistent with the necessary

, 286 income for Member Countries development, ,the market took that as 287 clear sign of an upcoming intensivecompetition for marketshare not 288 onlybetween OPEC and non-OPEC but also within OPEC.While the 289 decision of Saudi Arabia was meant to disciplineother members and 290 ultimately get the ceiling, production quotas and the marker price at , 291 more sustainable and equitablelevels, OPEC sdecision in December 292 1985meant an abandonment of its role as aresidual supplier, in short 293 endingits market management role.Inspite of theapparent 294 contradiction in the decision between defending afair market share

295 and the necessary income for member countriesdevelopment, the lack of

, , , 296 clarity as to the level of fair, and consistent contributed further to the 297 negative marketperception. The competition for market share among OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

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298 OPEC members after its decision led to adecline in the price of the 299 marker crude from $27.8 per barrel in December, to $23.8 per barrel in 300 January 1986. The oil pricescontinued their decliningtrend from then 301 on, reaching its monthly lowest at $8.5per barrel in July of that year, 302 averaging $13.7 per barrel for the whole year, around half of its 1985 303 average. The thenPresident of Aramco and future Saudi Oil Minister 304 later recounted that one Saudi cargooftwo million barrels destined for 305 Brazil fetched $3.25 per barrel in that month.8 306 Judging from the price outcome of the early netbackcontracts,and in 307 the aftermath of the December decision, it seemed that overproduction 308 contributed more to the price decline while netback pricing was aresult, 309 or the reason for the extent of the fall. It was observedthat prices haveto 310 fall alongway and price expectations have to remain depressedfor along 311 time for asigniﬁ cant improvement of the market share of those who 312 launch an oil price war. While netback pricing was viewed then as the 313 cause of the suddenpricecollapse. It wasonlyaconvenient tool with 314 which the market-share strategyofSaudi Arabia (later adopted by 315 OPEC) could be prosecuted. Producers, in their search for market share, 316 have contributed to the downward price spiral withoutnecessarily

317 resorting to netbacks. Although it was reported that Yamani had claimed

, 318 that Saudi, Arabia had engineeredthe glut it seemed from the 319 subsequent events that Saudi Arabia did not foresee such price collapse, 320 which indicate lack of market foresight and unpreparedness for the worst 321 outcome.9 The few months of early 1986 had shown signs of both , 322 disarray in Saudi Arabia smarketing policies (that is in the continued use , 323 of an already controversial netback pricing) and in OPEC sability to 324 come together and arrest the price decline. The mistrust betweenOPEC 325 members that had been building up since 1981 and the inability of Saudi 326 Arabia to exerciseeffectively its leadership in time of crisisboth 327 contributed to its severity andlongevity. 328 Thepattern of selling crudeinthe spot market or at discount 329 fromthe ofﬁ cial prices or in theform of processingdeals hadbeen 330 common in theearly eighties, when SaudiArabia (along with some OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

Saudi Arabia and the Counter-Shock of 1986 109

331 332 333 334 335 336 337 338 339 340 341 342 Figure5.1 PriceofArabian Light before and after the 1986 crisis. 343 344 otherproducers)chose to stick to ofﬁ cial pricing, sacriﬁ cing market

345 share. When SaudiArabia decidedtoabandon thedefence of ofﬁ cial

, 346 prices, it favoured netbacktothe otherforms of ,ﬂ exiblepricing 347 exercised at thetime,inorder to quickly capture thelost share and 348 make itslong-haul oilmore competitivewithshort-haul crude, beside 349 accommodatingthe industry,which then favoured netbackpricing. 350 TheSaudi success in regaining market shareand revenuegains

351 throughsuchapproach was duetothe fact that it was itsinitiator and

352 hadthe excess capacity.One OPEC veteranquipped ,it was there ﬁ rst 353 with themost, whileothers lagged behind or couldnot match the 354 Saudivolume offers.10 355 Butwhenother producers adoptedasimilarapproach,the tool was 356 used as ameans to further discount prices,forcing SaudiArabiato 357 modify the terms of itsearlier contracts to keep itsvolumegains. 358 As such,netbackpricing persemight notbethe main causeofthe 359 pricedecline,since theincreasing crude supplyimpacted reﬁ ned 360 products suppliesand theirprices, andconsequentlythe crudeoil 361 netbacks.However,netback contract, beinganimperfect tool in an 362 imperfect market,withall itsprosand cons wasassociated in away or 363 another with theoil pricecollapseof1986.11 OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

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364 Although it was clear that the price level and its administration by 365 OPEC since 1974, and more so after the supply interruptions of the 366 Iranian revolutionand the Iraq– Iran warduring 1979– 80, was 367 unsustainable, OPEC (led by Saudi Arabia) either defended that price 368 regime or undermined it by the lack of discipline in the pricing and 369 production throughout the period leading to the collapse. Market 370 dynamicscontinued to pressure OPEC to lower the ceiling and the 371 marker price, its members to circumvent the fi xed price regime, and 372 Saudi Arabia to defend the marker price through production cuts in , , 373 excess of OPEC sorthe member countries cuts. When Saudi Arabia felt 374 that its volume sacrifi ces resulted in revenue losses and declining 375 domestic deliveries of gas and that policy had negatively impacted its 376 commanding role in OPEC it decided to follow the other producers by 377 resorting to market related pricing choosingthe netback pricing 378 instrument to regain its marketshare. 379 However, other political factors besides this purely economicand , 380 oil-related rationale of Saudi Arabia sabandonment of the fi xed price 381 regime and of its swing role in OPEC, were given then. The most 382 common is the notion that Saudi Arabia in collusion with the US 383 governmentintentionally sought aprice collapse to denytwo other 384 producers, Iran and then the SovietUnion, the fi nancial resources that 385 had enabled the fi rst to continueits war with Iraq and the second its war

386 in Afghanistan. Although the subsequent Saudi response to the price

, 387 collapse withinOPEC invalidates this consp, iratorial theory, it had its 388 adherents especially in the international media. One does not needproof 389 that while Saudi Arabia regainedvolume during the course of the price 390 decline, it suffered52per centoil revenue losses, prompting it for the fi rst 391 time in its recenthistory to roll back its fi scal budget and impose 392 austerity measures detrimental to its very security and stability.Needless 393 to say, political factors did play arole in the price collapse,but not in the 394 framework suggested above. The polarisation resulting from the Iran– 395 Iraq warmade it diffi cult for OPEC to reach meaningful consensus to 396 deal with the market impasse resulting from the structural changes. The OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

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397 lack of trust amongits members aggravated the situation that led 398 ultimately to each country seeking its self-interest independent of the 399 common objectives of the organisation.12 400 401 Saudi Response to the Crisis 402 It was apparent to Saudi Arabia and to many market watchers at the time 403 that the post 1973 oil price regime could not be sustained amid the 404 structural market changes impacting demandand non-OPECsupply, 405 , and consequently underminingOPEC sself-proclaimed price adminis- 406 tration role. It took aprice counter-shock to realise this and set in motion 407 aprocessthat led by mid-1987 to the adoption of fl exible oil prices while 408 continuing to set production ceiling and quotas, thusabandoning the 409 anomaly of fi xing both volume and prices.The process started during the 410 fi rst half of 1986when OPEC met three times, realising that the cut- 411 throat competition amongproducers was not azero-sum game,but had 412 led to extremely low prices, intolerable to the producers, consumers, the 413 industry and the long-run market stability.However,after the dismissal 414 of Yamani, the symbol of the market share strategy, the stage wasset for a 415 , change in Saudi oil policy.Although in linewith Saudi Arabia spolitical 416 , tradition, no offi cial reason wasgiven for Yamani sdismissal. In his 417 semi-authorised biography, Yamani indicated that the reason for his 418 dismissal was his differing view withKingFahd in the midst of crisis to 419 return to a fi xed oil price and higher Saudi quota, which he thoughtwere 420 contradictory.Others reasoned that Yamani did not have with King Fahd 421 the same rapporthehad with the previous two kings, Faisal andKhalid. 422 The process of weakening Petromin,groomed by Yamani to be the 423 national oil company to take over from Aramco once the government 424 , , owned the latter sassets, was initiated during Fahd srein. This started 425 with stripping Petromin from its petrochemical functions and assigning 426 themin1977 to Saudi Basic Industries Company (Sabic) under the 427 auspices of adifferent ministry, as well as assigning the operation of the 428 Petromin-built East– WestPipeline – running from the Arabian Gulf to 429 OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

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, 430 the Red Sea – to Aramcoin1984,ultimately leading to Petromin s , 431 demise adecade after Yamani sdismissal.13 , 432 The apparent change in Saudi Arabia spolicy towards OPEC made a 433 compromisewithinthe organisation possibleinOctober1986, 434 reaffi rmed in December of that year. 435 This involved abandoning theArabianlight marker crudein 436 favour of abasket of sixOPECcrudesincluding Arabianlight andone 437 non-OPEC crude(MexicanIsthmus),areturntoalower fi xed oil 438 pricefor thebasket at $18per barrelcomparedtothe pre-crisislevel of 439 $28 perbarrel,anew 15 mb/d ceiling,quotasand thephasing outofall , 440 netback pricearrangements. Theagreement signalledSaudi Arabia s 441 abandonmentofits swingroleinOPEC, butdelayedfor ashort 442 whilethe eventual adoption of market-related prices.The latterwas 443 introduced by SaudiArabia in mid-1987 by meansofsellingits diverse 444 crude typestothe different marketsthrough monthly priceformulas, 445 linking thesale prices of its crudes to thepricesofother traded 446 crudes either in established commodityexchanges in London (Brent) 447 andNew York (WTI) – forsalesinEuropeand NorthAmerica 448 respectively – andtothe spot quotations of Dubaicrude forsalesto 449 Asia, with adjustments accounting for crude quality, transportation and 450 seasonalityvariations. Thisapproach wassoonadopted by most OPEC 451 members andsurviveduntil today. Thereferencecrudesfor the 452 formulas changedoverthe years refl ecting changesintheir liquidity 453 andcharacteristics in each market.Inessence, the formulapricing 454 method is avariant of netback pricing, butmoretransparent, balancing 455 theneedsofand riskstoboththe sellerand buyer. 456 The end of the price war and the returntothe ceiling and quota could 457 well be understood from the tolls that the price collapse had on the 458 revenues, economicgrowth and socio-political stability of all OPEC 459 countries, on the relevance of the organisation and on market stability, 460 thus necessitatingthe agreed compromise in late 1986.However, at that 461 time when oil matters were highly politicised, someanalysts , 462 reintroduced the political factor to explain OPEC sreturn to its market OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

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463 managementversus the short-lived free-for-all episode. This line of 464 political reasoninginferredthat the US governmenthad intervened with 465 Saudi Arabia during the visit to the Kingdom of the then vice president 466 George Bush in late 1986, urging it to end the price war on the grounds 467 that independent US producers in Texas, the home state of the vice 468 president, were deeply hurt by the oil price collapse.14 469 While this line of reasoning is contradictory to the notion that the oil 470 pricecollapse itself had been engineered by the United States – that is 471 through the perceivedSaudi– US alliance to lower prices to hurt Iran and 472 the Soviet Union – it is also contrary to the fact that the US consumers 473 and economy were enjoying lower prices. However,itseemed that the 474 US oil industry as well as its policymaking establishmentwere viewing 475 suchprices as unsustainable, jeopardising amongother thingsthe 476 energy conservation programmes, and underminingthe stability of its 477 alliesfrom oil producing countries. On the other hand,the crisis in the 478 Saudi economy and its development potentials were impacting the socio- 479 economic contractand required action. Onecan argue that the interests 480 of the producers and consumers converged towards amoresustainable 481 oil pricing, investment and supply security regime. Political factors might , 482 haveplayed arole in OPEC sabandonment of the marketshare strategy 483 but not in the framework suggested above. The severe hardships on Saudi 484 Arabia causedbythe price collapse could well be amajor factor for , 485 Yamani sdismissal, and the similar hardships on the other producers 486 facilitated the OPEC agreement which was more or less along with what 487 Saudi Arabia had wanted, an agreement that would not have been 488 possible before the crisis. 489 The counter-shock and the ﬂ exible oil price regime also coincided 490 with achange in demandpatterns the most notable of which wasthe 491 emergence of new demandgrowth centres in Asia and Latin America, 492 outside the OECD, which had traditionally dominated world oil demand. 493 While demand grew by less than 0.5 per cent annually in OECD since 494 1987, it was growing by close to 3per cent in those emerging economies 495 led by China, fuelled by rapid industrialisation and urbanisation. The OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

114 Oil Counter-Shock

496 developing countries share of global oil consumption increasedfrom 37 497 to 52 per cent between 1987 and 2015, contributing 80 per cent to the 498 global growthinoil demand. This, along with the slowdown in the 499 growth of non-OPEC production and even the declineinthe production 500 of the North Sea and the United States, led to an increaseof17mb/d in 501 OPEC production, commanding some 64 per cent of the global crude oil 502 production increases over the period. 503 The competitivedrive for market share lasted almost one year, 504 followedby ﬂ exible oilpricing andfrequentceiling andquota 505 adjustments by OPEC, which despite the pitfalls and imperfection of 506 the formula pricing and the production management, have contributed , 507 to the continuity of OPEC srole and its market relevance. The lessons of 508 the oil price episode of 1986 came to the fore 30 yearslater when OPEC 509 decided in November 2014 not to act in response to the growth of US 510 shale oil, effectively abandoning its production managementrole. This 511 ultimately led to aprice collapse of 58 per cent (from an average $96.3 512 per barrel. in 2014 to $40.8 per barrel in 2016) compared to the 50 per 513 cent decline during the 1986 episode(from $27 per barrel in 1985 to , 514 $13.5 per barrel in 1986) However,in1985, OPEC sspare capacity was 515 much higher than the 2015– 16 crisis – it wasestimated at 20 and 4per 516 cent of world demand respectively. Moreover,the patterns and ﬁ nancing 517 of developing shale oil production in the 2015– 16 crisis were different 518 than the development of the North Sea oil during the 1986 crisis. 519 In addition, compared to non-OPEC oil of the 1986 crisis there was 520 considerable room for cost-cutting for the shale industry in 2015– 16, 521 enabling resilient production and therefore prolonging the crash. 522 The response from OPEC this time around to reverse such approach 523 and return to the ceiling and quota system took longer. In both episodes, , , 524 Saudi Arabia srole in the price declineand in OPEC sreturn was 525 instrumental. However,the market environment in which the price 526 collapsed in the two episodes is different, although the actors remain 527 more or less the same: OPEC and Saudi Arabia on the one hand and the 528 United Statesonthe other (throughits longstanding anti-OPEC stance OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

Saudi Arabia and the Counter-Shock of 1986 115

529 preceding the ﬁ rst, and the impact of its shale oil revolutionpreceding 530 the second). This time around Russia, leading non-OPEC, played arole 531 in the return to production management to balancethe market at new 532 equilibrium.This wasevident through the oil diplomacy involving Qatar, 533 Saudi Arabia, Venezuela and Russia during April– Novemberof2016 534 and the willingness of Russia to enter into temporary arrangement with 535 OPEC and non-OPECcountries to cut production. However, the 2015 – 536 16 oil pricecollapse had initiated debate as to whether it had resulted 537 from structural market changes as the 1986 price collapse that required a 538 transition to anew price regime besides production management, or 539 whether it is acombination of transitory and structural factors, that does 540 not necessitate such atransition.15 541 542 Notes 543

1. In the height of the Arab– Israeli war of October 1973 and the accompanying

544 Arab, Oil Embargo against the United States, OPEC unilaterally increased

, 545 the posted, price of the barrel of Arabian light from $3.01 to $5.119, followed by an increase to $11.65 in January 1974. The supply shortage resulting from 546 the production cutback by Saudi Arabia and Kuwait and the embargo further 547 politicised the shock and added to the US public and media stereotypes 548 about oil and Arabs which are still prevalent until today. However, others have analysed the crisis in its proper market and political context. See John

549

Blair, The Control of Oil (New York, 1976); Dermot Gately, Lessons, from the 550 1986 Oil Price Collapse, , Brookings Papers on Economic Activity xvii/2 551 (1986), pp. 237– 84; and Raymond Vernon (ed.), The Oil Crisis (New York, 1976). , 552 2. The power sector suse of fuel oil in the OECD declined from 9.6 mb/d to 4.7 553 mb/d between 1978 and 1985, which was never recovered. , 554 3. Data from BP and OPEC sdatabases. 4. On these developments see Francisco Parra, Oil Politics: AModern History of 555 Petroleum (London, 2004), pp. 276– 9; and Pierre Terzian, OPEC: The Inside Story (New York, 1985), pp. 308– 19. 556 , , 5. On Yamani sand Saudi Arabia sviews on the market at the time, see 557 , Yamani saddress at the Oxford Energy Seminar published in R. Mabro (ed.), 558 OPEC and the World Oil Market: The Genesis of the 1986 Price Crisis 559 (Oxford,1987) andthe coverage in Petroleum Intelligence Weekly

throughout 1982. It was even reported that Yamani had actually said in a

560 , ,

meet, the press interview in 1981 that the glut was anticipated by Saudi

, 561 Arabia and almost done by Saudi Arabia .See Saudi, Arabian Oil Minister OCS Chapter5— 1/2/2018— NANDHINI.P— 571966— IBTauris

116 Oil Counter-Shock 562 Skeikh Ahmed Zaki Yamani said ..., , United Press International,19April 1981. Available at http://www.upi.com/Archives/1981/04/19/Saudi-Arabian- 563 Oil-Minister-Skeikh-Ahmed-Zaki-Yamani-said/9643505404605/(accessed 564 21 February 2017). 565 6. In itssimplestformnetback pricetakes thefollowing format NB t ¼ ( S WiPi) t þ 1 – (Cþ T þ M),where NB tstandsfor thenetback priceatthe time of 566 lading,WiPistandsfor theprice of productiweighted by itsshare Wi in the 567 refi nedbarrelatthe t þ 1time. Cstandsfor thecostofre fi ning,Tthe 568 transportation cost to there fi ning center andMis theagreedmargin. See Robert Mabro, NetbackPricing andthe OilPrice Collapse of 1986 (Oxford, 569 1987). 570 7. For afull technical analysis of netback pricing, see Mabro, Netback pricing; , 571 and for the different stakeholders views on that pricing see The Pros and Cons of Netback Pricing,Special Supplement to Petroleum Intelligence 572 Weekly,11August 1986. 573 8. See the memoirs of Ali Al-Naimi of the events leading and the response to the crisis in Ali Al-Naimi, Out of the Desert: My Journey from Nomadic 574 Beduin to the Heart of Global Oil (London, 2016), pp. 125– 45. 575 9. Also see note 5above. 576 10. See Parra, Oil Politics. 11. See Mabro, Netback pricing,p.34; and Parra, Oil Politics,p.284. 577 12. When the government announced the budgetary roll back, its oil revenues 578 had shown adecline from 88.4 to 42.5 billion Saudi Riyals between 1985 and 579 1986. See Saudi Arabia Monetary Agency, Annual Report (1986). 13. For the evolution of the Government– Petromin relation, see Steffen Hertog

580 , Petromin:, The Slow Death of Statist Oil Development in Saudi Arabia , , 581 Business History l/5 (2008), pp. 645– 68. On Yamani sview see Jeffrey 582 Robinson, Yamani: The Inside Story (New York, 1988). 14. The Bush factor in the Saudi decision to abandon the market share strategy is 583 mentioned in Daniel Yergin, The Prize (New York, 2009), p737. See Victor ,

584 McFarland schapter in this volume for arecent assessment. 15. See Bassam Fattouh, Adjustment, in the Oil Market: Structural, Cyclical or

585 Both?, , Oxford Energy Comment (May 2016). Available at https://www. 586 oxfordenergy.org/wpcms/wp-content/uploads/2016/05/Adjustment-in-the-

587 Oil-Market-Structural-Cyclical-or-Both.pdf (accessed 21 February 2017); and Robert Skinner, AC, omparative Anatomy of Oil Price Routs Between

588 1985 and 2014, , SPP Research Papers viii/39 (2015), pp. 1 – 36. 589 590 591 592 593 594 OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

1 2 3 4 5 6 6 7 8 9 10 Iran andthe Counter-Shock:Oil as a 11 Weapon(forSurvival) 12 13 14 Claudia Castiglioni 15 16 17 In August 1986 theIranian government, whichinthe previous six 18 yearshad fi ercelyopposed any attempt to complytoacartel-like 19 discipline within OPEC,opted forachangeinstrategywhich made 20 possiblethe conclusionofadeal with Saudi Arabia andthe other 21 members of theorganisationthatre-established quotas forall the 22 OPEC countries except forIraq. Theagreement signi fi cantly 23 contributed to bringing an endtothe marketshare strategy, 24 reintroducingaceiling on production and paving theway foralift 25 in price. Thedecision was taken in tune with more generalchanges 26 underwaywithinOPEC,but also as adirect consequence of the 27 overriding fi nancial problemsthatIran, oneofthe countriesmost 28 badly hitbythe sharpdecline in prices produced by thecounter-shock, 29 was facing after sixyears of war against Iraq.Starting from these 30 premises the chapter will analyse thepolicypursued by Iran duringthe 31 crucial years of 1985– 6, with particularattention forthe role played by 32 thewar effort andbydomestic dynamicsinthe defi nition of Iranian 33 policy duringand in reaction to thecounter-shockof1986. OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

118 Oil Counter-Shock

34 Oil and the 1979 Revolution 35 In the 25 yearsbetweenthe 1953 coup and the outbreak of the revolution, 36 there seemedtobelittle doubt that for Iran oil was to be considered 37 ablessing rather than acurse. Between 1963 and 1975 the country 38 experienced aperiod of unprecedented growth, made possible and 39 fuelled by the steadyincrease in oil prices and revenues. By the mid- 40 1960s, the petroleum sector had become the pivotal linkinthe economy 41 upon which the manufacturing sector was able to prosper, atrend further 42 reinforcedbythe oil shock of 1973. As aconsequence of the fourfold 43 , increase in OPEC sposted price,inwhich the Shah played apivotal role, 44 , Iran soil revenues jumped from $2.8 billion to $4.6 billion in 1973– 4, 45 , and to $17.8 billion in 1974– 5. The steep surge forced Iran sPlanning 46 and Budget Organization to revise the terms of the Fifth Development 47 Plan and raise the totalinvestment target from $36 billion to $70 billion.

48 The Great, Civilizationdream, suddenly became areality, and massive 49 , amounts of money were pumped into Iran sfast-growing economy. 1 Yet 50 , Iran sstrength and growth soon revealed their feet of clay: the profound 51 reliance of the industrial sector and of the entire economicsystemonoil 52 income resulted in an extreme vulnerability to any shock such as adrop 53 , in the world sdemand for Iranian oil or anominal contraction in crude 54 prices.2 The weak foundations of the Iranian economy becameevident 55 after 1975, when the phenomenal growthrate of the previous two years 56 came to asuddenhalt as oil revenueslevelled off.3 57 Mohammed Reza Pahlavi, faced with an over-heated economy andwith 58 theskyrocketing costsofhis development projects, continuedtopressure 59 theother OPEC members forhigherprices, but, contrary to theearly 1970s, 60 this time hiscampaignfailedtoachieve thedesiredgoal. As Robert Graham

61 hasargued: Du, ring this period theShah[... ]continually underestimated 62 theSaudi position andtheir capacity to enforceit. TheShahseemedunable 63 to acceptthe changedpolitical circumstances., 4 After twoyears of struggle, 64 by theend of 1977 theShahwas eventually inducedtocompromisewiththe 65 more moderate OPEC members andsupport aprice freeze clearlyatodds 66 OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

Iran and the Counter-Shock: Oil as aWeapon (forSurvival) 119

, 67 with Tehran spolicyofmassive economicand military spending. 5 68 According to some commentators,the choice also resulted from Riyadh , 69 andWashington sability to take advantage of themounting domestic , 70 pressureinIranand theresulting deterioration of theShah spositionto 71 reducehis leverage andin fl uence within theorganisation.6 Thesubsequent 72 contractioninoil revenues, furtheraggravatedbythe strikes that brokeout 73 in theoilfi elds in October1978, combined with rampingin fl ation, rising , 74 unemployment,and growing dissatisfactiontowards thePahlavis rule, , 75 concurred to thefurther escalation of Iran sdomesticcrisisand to the 76 eventual demise of theregimeinJanuary 1979. 77 The immediate aftermath of the revolutionsaw asudden and , 78 signi fi cant drop in Iran soil production, which evenhalted completely 79 for afew weeks before recovering in the secondhalf of 1979. In mid-1978 80 Iran was producing over 5.2 mb/d;bylate 1981 daily production was , 81 running at 1.2 mb/d. 7 The plunge, which resulted in afall in the country s 82 revenues, in an extreme volatility in the energy markets and in asteep 83 riseinprices, was produced by the domestic turmoil and the consequent 84 problems in operatingthe facilities, by the decision by the new leadership 85 in power to reduce the levelofoil production to around 30 per cent 86 belowits average levelover the 1971– 8period,bythe outbreak of , 87 hostilities with Iraq in September 1980, and by the government s 88 diffi culties in adjusting its policy to increasingly unfavourable market 89 conditions.8 In the words of Shaul Bakhash: 90 91 After the revolution oil policy had to be formulated under volatile 92 conditions and often to satisfy the demands of confl icting policies 93 and goals. At the same time, oil had to be adjusted to changing 94 market conditions: initially to amarket in which demand was high and prices strong. Subsequently to amarket in which demand and 95 prices were rapidly falling.9 96 97 , 98 By curbing the country sproduction capabilities while, at the same time, 99 increasing its need for immediate and substantial cash fl ows, the OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

120 Oil Counter-Shock

, 100 revolutionexacerbated the aggressive natureofTehran soil policy.This, 101 in turn, sharpened the sourcesoffriction betweenIran and the Arab 102 states of the Persian Gulf, profoundly affecting the premises and the goals , 103 of Iran spoliciesinside OPEC,10 and elevatingoil politics as the key 104 arena for Iranian– Saudi tensions.11 105 The new regime immediately revised the terms of the relationship 106 between the state and National Iranian Oil Company. Article 44 of the

107 new revolutionary constitution offi cially reserved oil, along with other 108 signifi cant sectors of the Iranian economy,tobe publicly, owned and , 109 administered by the state . 12 In alargely symbolic gesture, on 28 February 110 1979, the revolutionary government unilaterally abrogatedthe remnants , 111 of the concessionary agreement. NIOC would now market all of Iran soil 112 itself and hire contractors directly.13 In September1979 Hasan Nazih, a 113 human rights lawyer who had been appointed as chairmanofNIOC after 114 therevolution, wasreplacedbyAli-Akbar Moinfar, whowas at the 115 same time appointedministerofoil.EvenifMoinfar wasnot aradical, 14 , , 116 Nazih sdismissal made Tehran soil policy more contingent upon the 117 powerstruggleunderwayand,togetherwithPrime Minister Mehdi , 118 Bazargan sresignation in November,markedaweakeningofthe moderate , 119 forces within therevolutionary leadership.Moinfar stenurelastedayear. 120 Thefollowing Septemberhewas briefl yreplacedbyMohammadJavad , 121 BaqerTondguyan and, afterTondguyan scapture by Iraqiforces, by , 122 Mohammad Gharazi, whoretainedthe position until1985. AfterNazih s 123 dismissal, NIOC begantopursueamore aggressive pricingpolicy. Inside 124 OPEC Iran,soonjoinedbyLibya andAlgeria,tookevenmorehawkish 125 positions, constantly pushingfor larger andmorerapid pricesurgesthat 126 couldincrease the fl ow of cash in therapidly emptying coffers of thestate. 127 Oilrevenuesin1982still accountedfor over 80 percentofall government 128 revenues and90per cent of foreignexchangeearnings. When prices began 129 to weaken,Iranarguedstronglyfor theadoptionbyOPECmembers of 130 production limitationstosustain high prices. 131 The revolutionalsoallowed the emergence of adifferent approach to 132 oil politics within the new revolutionary elite: some of the new men in OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

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133 powerinTehran started to favour morerestrainedlevels of development 134 spending and production.15 Agrowing hostilitytowards the large 135 international oil companies, the majors, becamewidespread,leading to , 136 the idea that their role and inﬂ uence in the functioning of Iran soil 137 industry should be further diminished. This approach wasfomentedby , 138 the fear of aforeign conspiracy aimed at exhausting the country s 139 resources to weaken it and make it dependentonthe West, which , 140 somehow echoedMossadeq sexperience and historical legacyofmistrust 141 towards international oil companies.16 In this sense the revolutionwas 142 viewed by some members of the new elite in powerasachance to launch ,

143 anew phase in the country seconomic development, where oil revenues 144 would be usedto promote, Islamic values and asustainable growth, , 145 ratherthanexploitation, immorality andthe monarch sapish , , 146 ambitions . 17 Despite the profound impact theseideas had on Iran s 147 post revolutionary oil policy,they did not lead to acomplete reshuffl eof , 148 Tehran spriorities, alwaysallowing room formorepragmatic 149 approaches.Asithas been recentlyargued by Suzanne Maloney: 150 , 151 The early phases of Iran snew order where dominated by 152 improvisation, exigency, institutional upheaval, and political 153 competition. [ ... ][But] [e]ven in the midst of such intense 154 institutional warfare [ ...]the emerging state was also subject to powerful forces of stability.18 155 156 , Nevertheless, in the fi rst years after the revolution, Iran soil policy 157 underwent major structural changes.These changes resulted from the 158 , country sincreased need of revenues, from the new marketconditions 159 , and from the new views that were spreading withinIran snew 160 leadership. Short-term contracts, awide variety of customers to whom 161 Iran sold oil directly,19 afurther reduction of foreigninvolvement in the 162 , country soil sector, the sale of large volumes on the spot market (from 163 5to10per cent), the consequent attempt to sell crude to regular 164 customers at infl ated spot prices, amoderate decrease in production, the 165 OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

122 Oil Counter-Shock

166 disruption of someofthe traditional lines of supply (even though most of , 167 Iran scrude remained destined to Europe and Japan), and the growing 168 reputation for unreliability as asupplierbecamethe major features of , 169 Iran soil policy,apolicy centred around the idea of fl exibilityand short- 170 term gains.20 171 To some extent the new pricing and selling policy pursuedbyTehran , 172 refl ected some changes underway in the companies market strategy.21 173 Since the second oil shock their focushad shifted from long-term , 174 contracts to the spot market in order to reduce OPEC srole as price 175 setter, atrend in which British Petroleumled the way.22 This tendency 176 resulted in the increase of the amount of crude oil sold on the spot 177 market or at priceskeyed to the spot market from 10 per cent in the late 178 1970s to more than 50 per centbythe end of 1982.The aggressive and 179 short-term-orientedpolicy pursued by the new revolutionary elite in 180 power concurredtothe sharp rise in oil prices in 1979(from $13.45 181 to $31). At the same time the fascinationwiththe idea of limiting oil 182 exports, especially supported by the leftist elements of the new Iranian 183 leadership like President Abolhassan Banisadrand the prediction that 184 prices would stay high indefi nitely, consolidated the argument for lower 185 production.23 The sale strategypursuedbyTehran eventually led to a 186 drop in exports and production far beyondthe predictions (and 187 intentions) of the Iranian leadership. 188 In synthesis, amixture of contingent, ideological and economic , 189 determinants shaped the fi rst phase of Iran spost-revolutionaryenergy

190 policy: adifﬁ cult ﬁ nancial situation, widespread theoriescallingfor a , , 191 transitiontoan Islamic economy vaguely based on egalitarian ideas, the 192 exceptionally high oil prices, and the consequent encouragementto 193 rely on spot markets for the allocation of its, declining, production. 194 In this context the outbreak of the war altered thesedynamics by

, 195 transfo, rm[ing] the state smandate from an ideologicalone to amaterial

, , , 196 one ,while Iran scopiousrevenues enabl[ed] its leaderstoembrace this 197 agenda withoutappreciating the extent to which it would undercut their , 198 original source of legitimization . 24 OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

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199 Oil Policy at War 200 , As aconsequence of Tehran spricing and production policy,onthe 201 eve of the Iraqi invasion in September 1980 exports stood at about 202 700,000 b/d compared to the 4.6 mb/d of 1978,while oil revenues had 203 dropped to $10.5 billion compared to the $25 billion of 1978.25 The war 204 , put further strainonIran salready declining export capacity: the confl ict 205 greatly affected refi nery and oil-exporting facilities of both countries; it 206 infl icted damagetothe oil terminalonKharg and it interfered with 207 tanker traffi conthe Persian Gulf. In 1980– 1, Iraqi bombing and shelling 208 destroyed 65 per cent of Iranian refi nery capacity, severely damaged the 209 port of Khorramshahr and the Iranian– Japanese petrochemical complex 210 , , at BandarMahshahr. Iran soil exports were reduced, while Iraq salmost 211 ceased.26 Only the intervention of Arab allied states, fi rst and foremost 212 Saudi Arabia, allowedIraq to sustain the war effort despite the abrupt 213 , fall in oil revenues. The plunge in Iran and Iraq sproduction and the 214 resulting panic in the energy markets caused anew peak in prices 215 after the one recorded the previous year. In its initial stages, the Iran– 216 Iraq war abruptlyremoved almost 4mb/d of oil from the world market, 217 15 per cent of total OPEC output and 8per cent of Western demand. Yet 218 the increasingsupply of cheap oil by non-OPEC producers eventually 219 prevented the potential (and feared) shortageofoil. The rise in sales by 220 countries such as Norway and Britain startedtoalter the structure of the 221 market in ways not foreseen by the OPECcountries, aprocess that would 222 ultimately force them to confrontthe choicebetween cutting pricesto 223 regain markets or cutting production to sustain prices. 224 In themeantime Iranfaced afurther contraction of itssales.

225 , In 1981 the government sinsistence on ,defyinggravity , and 226 maintaininghighoil prices during aworldoil glut,and itsreputation 227 , forunreliability amongcustomers,reduced Iran soil exports to nearly 228 , one-third the level necessary to meet thecountry sforeignexchange 229 requirements. In response to therapidly deteriorating economic 230 situation,the government ﬁ nallyopted forachange in policy.Atthe 231 OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

124 Oil Counter-Shock

232 OPEC conferences in late 1981 andin1982 Iran surprisedother 233 participants by reversing itshigh-pricepolicy,agreeingtoareduction 234 of ofﬁ cial prices andworking more closely with othermembers. At the 235 conference in GenevainOctober1981 members agreedtoset anew

236 reunifi ed marker priceof$34 abarrel forArabian light. 27 This 237 signi fi cant decision ,demonstrated that unrealisticallyhighprices 238 couldnot be maintainedinasoft marked and provided aface-saving , 239 formula by whichthe Iranian authorities could reduceIran sown , 240 infl ated prices . 28 , 241 The partial shift in the country soil policy which allowed the 242 achievement of the agreement and which was combined with under-the- 243 table deals to regain buyers, push for higher quotas and campaign to 244 reduce the Saudi one, represented one of the fi rst manifestations of the 245 tilt to limited fl exibility and pragmatism in economicmanagement after 246 the excesses of the fi rst stages of the revolution. The readjustment 247 also refl ectedthe changes that occurred in the Iranian governmentfrom 248 mid-1981tomid-1982.29 In June 1981 PresidentBanisadr, one of the 249 major supporters of the policy of limiting production, left his offi ce 250 (and the country) after being impeached by the Parliament. In November 251 an editorial published in one of the most infl uential newspapers , 252 clearly stated the need to use oil revenuesto fi nance the country s 253 reconstruction.30 In February 1982 the Central Bankseverely curtailed 254 imports and the NIOC, in abid to rebuild its oil sales, cut pricesby 255 $5 perbarrel and launched and aggressive marketing campaign. Iran 256 gave price discounts under the table and exchanged oil for goods in 257 barter deals with Eastern Bloc and Third World countriessuch as 258 Romania, Brazil and Taiwan. This was accompanied by an energetic 259 campaign to improve trade ties and win friends abroad, and to resume 260 work on major projects, which required foreigntechnical expertise.31 261 Agoods-for-oil agreement worth $1 billion was concluded with Turkey, 262 while foreign companies, especially Italian,German and Japanese, 263 were invitedtoundertake anumber of projects including oil-well 264 maintenance. By the summer of 1982, technocrats in the cabinet were OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

Iran and the Counter-Shock: Oil as aWeapon (forSurvival) 125

265 gainingin fl uence, bringing backplanning, technical expertise and fi scal 266 responsibility in the running of the country. While the political and 267 ideological leadership remained fi rmly in the handsofthe clergy, they 268 were allowed acertain room for manoeuvre in the conduct of the 269 economic policy. As Shaul Bakhashhas put it: 270 271 For nearly three years Iran had made oil policy ahostage to 272 ideological considerations and internal political rivalries. Offi cials 273 had again and again misjudged the state of the oil market. The 274 revolutionary government had decimated the ranks of its own managerial staff in the oil industry and mismanaged the economy. 275 [ ... ]Asaresult, the Islamic Republic in early 1982 found its 276 foreignexchange reserves nearly exhausted, itstraditional 277 marketing networks disrupted and buyers for its oil hard to fi nd.32 278 279 It wasagainst this background that themorepragmatic elements within 280 theIranian government, immune to thewidespreadfascination with the , 281 idea of reducing thecountry sproductionand concernedbythe long-term 282 impact of thedeclining revenues,started to push foranaggressivepolicy 283 in theoil markets. This trendwas paralleled by theadoptionofamore , 284 confrontationalstrategyvis-à-vis Iran sneighbouringcountries,especially 285 theGulfstates. Starting from late 1981 thesupreme leader,Ayatollah 286 Ruhollah Khomeini,openlyencouragedIranian pilgrims to use hajj,the 287 annual Muslim pilgrimage to Mecca, as an occasion to organise 288 demonstrations in favour of therevolution, callingfor an Islamicuprising 289 in theregion. In 1982 Iran launched its fi rstcounter-offensive in Iraq;the , 290 country smilitarygoalchanged from thedefence of itsterritory to the 291 overthrowofSaddamHussein andexportofthe revolution.InLebanon , 292 Iran srevolutionary guards, thePasdaran, helped thecreationof 293 Hezbollahinthe struggleagainst Israel.Thisphase of regional dynamism, 294 whoselaunchprovedthe prominence of thewar effort over the 295 divergencesbetween thepragmatic andideological wingsofthe leadership, , 296 marked ashift in Tehran sapproachtothe region andtoits Sunni , 297 counterparts,withrepercussions also on OPEC sinternaldynamics. OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

126 Oil Counter-Shock

298 Iran as aRecalcitrant Member of the OPEC Cartel 299 The price set at the Geneva meeting in October 1981, $34, proved to be 300 too high, generating anew supply glut in the market. By 1982 Saudi 301 Arabia had already started to act as aswing producer. The changes 302 underway in the oil market and the pricing policy pursued by OPEC 303 resulted in the ﬁ rst attempts to impose acartel-like discipline in 1982. 304 The extraordinary conferencethat took place in Vienna in March 1982 305 announced an OPEC ceiling on production of 17.5 mb/d, almost half 306 the level of 1979,allocated quotas and set up aMarket Monitoring 307 , Committee. OPEC was ﬁ nally turning into acartel. Both Iran and Iraq s 308 quotas were set at 1.2 mb/d but it wasclear that, whateverquotas were 309 attributed to the two belligerents, these were onlyvalid to the extent that

310 either country was physically constrained by the wartothat quota. War,, 311 not surprisingly, provided in practice a force majeure exclusionclause for 312 both countries., 33 The stakes were large and the economicneeds of each

313 party substantial. It becameevident that none, of the three Gulf powers 314 would haveheld back production for long if the others were aggressively 315 seeking alarger marketshare, . 34 Iran declared its ﬁ erce opposition to the 316 quota system adopted in Vienna and, in July 1982, argued for areduction 317 in production from SaudiArabiathatwould have allowedTehranto

318 increase itsown share. To, many observersthe July conference [combined 319 with Iranianoffensive in Iraq]seemedtomarkthe re-emergence of Iran as 320 an assertiveand inﬂ uentialmemberofOPEC., 35 321 Iran quickly began to pursueapolicy at oddswith the one designed 322 by the organisation, maximising its oil production regardless of the quota 323 system and turning into a de facto non-OPEC player.36 Partly in revenge 324 against the Arab oil countries that were supportingIraq in the war, the 325 , Iranian policy boostedits crude output: the country sproduction rose 326 from 1.1 mb/d in March 1982 to 2.8 mb/d in December of the same year 327 (see Figure 6.1). At the same time Iran did not make any attempttoraise 328 , its selling pricesinthe light of OPEC srenewed determination to defend 329 the $34 marker price and remained $4 below the ofﬁ cial level. In the 330 OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

Iran and the Counter-Shock: Oil as aWeapon (forSurvival) 127

331 332 333 334 335 336 337 338 339 340 341 342 343 344 , Figure6.1 Iran soil exports and prices,1979– 2009. Source: Evaleila , 345 Pesaran, Iran sStrugglefor Economic Independence:Reformand 346 Counter-Reform in the Post-Revolutionary Era (London, 2010), p. 184. 347 , 348 summerof1982 Iran spersisting obstructionism towardthe quota 37 349 system markedthe end of the fi rst attempt by OPEC to work as acartel. 350 In themeantime theincreasing fi nancial burden of thewar further , 351 exacerbated the government seconomicproblems.ByMarch1983 the 352 damagescausedbythe con fl icttoIranian production and wealth 353 amounted to $135.8 billion,including thelossofoil revenuesat$33 38 354 billion. Thewar andwar-related activities were absorbing almost one- 355 thirdofthe budget. It drainedawayforeignexchange, whileIraqi , 356 attacks on tankersdisrupted Iran soil exports, raised the costs of 357 insuranceand forced Iran to continuetooffer itscustomers substantial 358 discounts in oilprices. Oilrevenues in 1983– 4, thoughincreasing 359 from $11.5 billion in 1981 to $21.5 million in 1983, were still$3.7 39 360 billion below projected earnings. Thedifference between projected 361 andeffective revenuesresulted in ade fi citinthe balanceofpayment 362 andinthe imposition of anew roundofrestrictionsonimports in 40 363 1984. Thepersistent economicdiffi cultiestriggered a fi erce debate OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

128 Oil Counter-Shock

364 amongthe variousgroupsinpower, especially between themore leftist 365 exponents as Prime Minister MirHosseinMousavi, thepragmatists like 366 theSpeakerofthe Majles AkbarHashemi Rafsanjani and those ﬁ rmly 367 aligned with Khomeini andhis party. 41 368 In mid-1983, at theOPECmeeting in London,anew agreementwas 369 reached. As aconsequenceofthe reductionofNorth Sea andNigerian 370 prices andofthe failureofthe quotasystem,the OPEC countries under 371 Saudileadership,decidedtoreducethe marker priceto$29, granting a 372 temporaryexception to Nigeria. Forthe ﬁ rsttimesince itsestablishment , 373 OPEC reduced insteadofincreased theprice of oil. Iran squota was 374 increased from1.2 to 2.4 mb/d;Saudi Arabia assumedagain theroleof 375 swingproducer, whileIraqaccepted to keepits 1.2mb/dquota underthe 376 conditionthatitwould be revised upwards when it wascapable of 377 exporting more.The decision marked the second attemptbyOPECtoact 378 as acartel,after the failureofearly 1982. Thesystem somehowsurvived 379 untilmid-1985, butmostlythanks to Saudiwillingness to keep its 380 production down,while cheating andincreases in production remained

381 therulebothwithinand withoutOPEC. As commented by Daniel Yergin: 382 Sec, urity washardlyanissue anymore. What mattered wastobe , 383 competitive in aglutted market. 42 384 Alreadyinlate1983OPECproductionwas averaging1.5 mb/d above 385 theagreedceiling.Concerns forthe constant increase of non-OPEC 386 production anddoubtsonthe abilityofthe organisation to guaranteethe 387 applicationofthe London agreementinasituation of decliningdemand 388 andexternalcompetition grew stronger,while internal OPEC discipline 389 showed itsclear limits.Bythe endofthe year Iran went back to its 390 traditional policy of pressurefor higher prices,proposing areturnto$34 391 perbarreland more rigorous production quotas while, at thesametime, 392 continuing itspolicyofdiscounting itsprice to whatever extent was 393 required to keep itscustomers andmaintainits oilexports.Atthe OPEC 394 meetinginOctober1984productionquotaswerereadjusted: in thecaseof , 395 Iran itsquota wasreduced from 2.4mb/dto2.3 mb/d whileIraq swas 396 con ﬁ rmed at 1.2mb/d. As amatteroffact, thetwo countries continuedto OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

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397 producewhatevertheycould,withlittleornoconsideration forthe quota 398 system. 43 Thecarteland thesystemremained, at leasttemporarily,in 399 placebut itsmembers were facedwithacrucialchoice: they couldeither 400 comply to full discipline or risk Saudiwithdrawalfromits role as aswing 401 producer. 402 403 The Counter-Shock of 1986 404 In 1985 it becameall tooclear that the organisation wasfacing adeep 405 , crisis. OPEC slack of discipline wascomplete. Most of its memberswere 406 cheating around the quota system while the rivalry between Iran and Iraq 407 impeded any new effective agreement on prices and quotas.44 As a 408 consequence of the evident failure of the quota system, in mid-1985 409 Saudi Arabia abandoned its swing-producerrole, increasedproduction

410 and aggressively moved to capture, its fair share of the market, ,marking 411 ashift from apolicy aimedatdefending price to one of defending its own 412 volumes of production. From August 1985tomid-1986, OPEC output 413 rose by about 4mb/d,while prices fell from $29 to below$10 per barrel. 414 Morethan half the surge in production came from Saudi Arabia, but 415 some other members alsohad signi ﬁ cant increases, especially Kuwait, the

416 UnitedArabEmirates, Iraq and Nigeria. Of, ﬁ cial prices ceasedtoexist 417 for Saudi Arabia as they had already in practise ceased to exist for many 418 other OPEC members and as they would now cease to exist for all., 45 The 419 Saudis hoped that what theylostbecause of lower prices,they would 420 makeupwith higher volumes. To some extent they were pushing further 421 the policy of cheating and selling cheap oil that had been pursued by a 422 large number of OPEC countries in the previous years, ﬁ rst and foremost

423 by Iran. As noted by Yergin it, was not merely that prices were collapsing 424 [ ... ]. For the ﬁ rst time in memory, there was no price-setting structure 425 [ ... ]And, in the ﬁ ercely competitive environment, the matter came 426 down to offering discount after discount to assure markets.46 427 In retrospectthe collapse of thequota system andthe failureofOPEC

428 to actasacartel were af, ailure of self-discipline, butalsoamisreading of 429 OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

130 Oil Counter-Shock , , 430 theportents .OPECmembers didnot comprehend that if they failed 431 individually to keep thecartelrulethattheyagreedtoimposeupon 432 themselves,there wouldcomeatime when thewhole system wouldbreak , 433 down . 47 In this scenarioIranplayedakeyrole. Itsde fi antattitude, 434 produced by theeconomicdiffi cultiesthe countrywas goingthrough,by 435 thewar effort andbythe short-seeing andideologically constrainedpolicy 436 Tehran pursuedinthe energy sector,heavily contributedtothe lack of 437 discipline within theorganisationthatultimatelyled to thedecisionby 438 SaudiArabiatoabandon theroleofswing producer andstart to sign , 439 netbackcontracts at prices determined outsidethe frameworkofOPEC s 440 offi cial price-setting. 441 In the conference held in Geneva in December1985 price hard-liners

442 within OPEC, i.e. Algeria, Iran and Libya, dissociated themselves from , , 443 the fair market share decision on the groundsthat volume gains by the 444 OPEC countries would not be suffi cient to compensate for the drop in 445 prices resultingfrom aprice war with the non-OPEC exporters. They 446 asked for much lower quotas in order to return to a$29 price. Iran was 447 among the countriesmost affected by the decline in oil prices produced 448 by the counter-shock: its oil earningsinthe fi rst half of 1986 were down 449 42 per cent from the same period in 1985. After struggling so much to 450 bring itsrevenues backabove the $20 billion ceiling in 1983 and 1984, , 451 Iran srevenues had now dropped again to $7.5 billion in 1986.The 452 decline hit the country in one of the most delicatemoments of its war 453 against Iraq, whose costs would fi nally amount to $645 billion.48 Despite , 454 the great damage infl icted by the counter-shock on Iran sprecarious 455 economy and the long-term unsustainability of its hard-line position 456 within theorganisation, Tehran long hesitatedbeforemovingtowarda 457 compromise with theother OPEC countries, fi rstand foremost with Saudi 458 Arabia andits OilMinisterAhmed Zaki Yamani.ThroughoutMay and 459 June 1986,asthe proposal of anew setprice of $18started to circulate, the

460 newIranian OilMinister, Gholam Reza Aghazadeh, continuedtoinsiston 461 higher prices andtoopposeany discussion over production: Th, egroup , 462 must ﬁ rstagree on aprice level ,the IranianministerdeclaredinJune OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

Iran and the Counter-Shock: Oil as aWeapon (forSurvival) 131 463 1986,atthe eveofthe Brioni meeting, th, is will determinewhatproduction , 464 is goingtobe . 49 Aghazadehalsostressedthat$28 priceremainedthe price 465 OPEC should defend,distancinghimself from thedecisiontaken in Taif a 466 fewweeks earlierbysix of themembers to setthe newprice at $18 – 19. 467 At thesametimeAghazadeh started to show some partial ﬂ exibility, 468 admitting thepossibilityofsomelower, intermediate, pricetobeagreed

469 andsome modest production cuts as anecessary step in ordertoreturn 470 to higher prices.50 In thewordsofSuzanne Maloney, ,whilethe rhetoric 471 remained at ahighpitch andlittle progress appearedonthe horizon, 472 theprecipitousdecline in prices wasforcing bothsides toward the , 473 centre . 51 Thechangeinpolicy became concreteafew weekslater, when 474 theIranian leadership took an unprecedented initiative that denoted 475 theshift toward amorepragmatic policy in ordertore-establish the 476 collaboration with SaudiArabia on oil prices andquotas.52 In August

477 1986, whilemostofthe otherOPEC countries were movingtowardsa 478 reduction of production in ordertostrengthenthe price, the ,slight,

479 soft-spoken OilMinister of therevolutionaryGovernmentofIran, , , , 480 Gholam Reza Aghazadeh hadaprivatemeeting with the patrician

481 SaudiArabian OilMinister, SheikAhmed Zaki Yamaniinthe latter s , , 482 spacious17th fl oor suite in theHotel Inter Continental in Vienna. 53 , 483 Themeeting wasconveyedatthe initiativeofTehran snew minister of 484 oil, pressured by theapparently unstoppablefall of prices andbythe 485 fi nancial burden of theongoing confl ictwithIraq.Iran, throughits 486 ministerofpetroleum,was fi nally willingtoacceptnot only the 487 temporary,voluntary quotas pushed by Yamani andothers,but also the 488 exclusion of Iraq fromthe system. Iran had, in fact, backed down.Its oil 489 policy proved to be more pragmaticthanits foreign policy. 54 Thanks to 490 theinformal agreement between Yamaniand Aghazadeh, theOPEC 491 August meeting resulted in thedecisiontolimit theoutputof12ofits 492 13 members from thebeginning of September to the end of Octoberto 493 14.8 mb/dinanattempt to bolsterpricesbyremoving excess supplies 494 from themarket. After theaccord wasreached,pricesrose to nearly 495 $17abarrel fromless than $10 abarrel. OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

132 Oil Counter-Shock

, 496 Iran sprotracted reluctance to agreetothe Saudi-sponsored project 497 of quota allocation betweeninthe fi rst half of 1986 focused on the , 498 comparison between Iran and Iraq sshares, an aspect that continued to 499 link the intra-OPECnegotiations with the GulfWar. In this sense the 500 greatest concession that the Iranian leadership made in August 1986 was 501 to accept the exclusionofIraq by the quota system, rather that to agree 502 on the system per se. Anew quota allocation scheme was fi nally 503 introduced in December, together with a fi xed price of $18; despite 504 the decision by Iraq to dissociateitself from the negotiations, anominal 505 Iraqi quota was introducedinthe OPEC total. And yet, as Ian Skeet 506 has argued: 507 508 The eventual agreement of Iran to permit Iraq to stay outside the , 509 OPEC quota and itself to accept an $18 price signifi ed Iran s 510 preoccupation with the need for revenue to carry on its war with 511 Iraq more than any sudden agreement or alignment with Saudi Arabia.55 512 513 Theconvergence, whichcameasthe result of both domestic and 514 , internationalfactors that signi fi cantly constrainedIran sroomfor 515 manoeuvre, wouldsoonprove to be short-livedand contingent to the 516 circumstances.Asarguedbelow,the agreementdid notheraldanewphase 517 of collaborationbetween Riyadh andTehranoradecline in tension

518 betweenIranand itsneighbouringcountries. Li, ke earlieropenings 519 betweenthe northern andsouthernGulfpowerhouses,[... ]any goodwill 520 betweenTehranand Riyadh [ ... ]was soon shattered., 56 Nevertheless the 521 compromise didstand as amomentofrede ﬁ nition of theoil policy 522 pursued by theIslamic Republic sincethe revolution,marking aturning 523 pointinthe negotiations that revolved around thecounter-shock. 524 525 Conclusion 526 527 The temporary truce between Tehran and Riyadhonenergy matters , 528 further consolidated by Yamani sdismissal as Saudi oil minister in late OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

Iran and the Counter-Shock: Oil as aWeapon (forSurvival) 133

529 October 1986, did not meanthat the two countries were ready to embark 530 on apath of far-reaching collaboration.Throughout the fi nal phases of 531 the GulfWar, Saudi Arabia further intensifi ed its fi nancial, military and , 532 diplomatic support to Iraq, especially after Iran scapture, in February , 533 1986, of the Faw Peninsula, the site of manyofIraq soil installations. 534 The Tehran government, for its part, resumed its calls inside and outside 535 OPEC for areduction in Saudi oil production.

536 At the same time the historical agreement reachedinAugust 1986, 537 forge, dinhours of bitter haggling by the oil ministers of Saudi Arabia , , 538 and Iran , 57 marked asigniﬁ cant step in Iran sshift from the initial ,

539 ambition of making the oil industry asymbol of the regime snew 540 economic policy to astrategydominated by, the inescapable need of the , 541 post-revolutionarystate for revenues to meet popular expectations and 542 sustain the costs of the ongoing confl ict against Iraq.58 The choice was 543 taken in tune with more general changes underway within OPEC, but 544 alsoasadirect consequence of the overriding economicproblems that 545 the Islamic Republic wasfacing,after six years of war in apolitically , 546 unstable situation. In this sense Tehran sdecision to partially revise its 547 policy within OPEC under the initiativeofhis Oil Minister,Gholam Reza 548 Aghazadeh, demonstrates how the need to fi nd an arrangement with the 549 other OPEC membersand thus reinforce the role of the organisation vis- , 550 à-vis its external competitors,imposed itself as the country stop priority, 551 prompting the leadership in Tehran to temporarily compromise on its 552 anti-Arab and anti-Saudi policy. , 553 Back in 1982– 4Iran suncooperative attitudetoward the quota 554 system, its tendencytoopenly challenge OPEC offi cial price-setting 555 by selling discounted oil on ashort-term basis had signifi cantly 556 contributed to the change in Saudi policy and to the relinquishment of 557 the cartel-like discipline in favour of amarket share strategy. It is all the 558 more unlikely that in the mid-1980s the leadership in Tehran was aware , , 559 of the shift from aproducers to abuyers market that had been taking 560 placesince the late 1970s, but to some extent they behaved accordingly, 561 thusconcurring with the change.Yet the policy of barter deals and OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

134 Oil Counter-Shock

562 discount prices as pursued by the revolutionary elite proved to be 563 ultimately unsustainable: only in asituation of artifi cially high prices, 564 like the one that existed between 1981 and 1985,Iran could havehad 565 preferential access to the market, pursuing its policy of maximisingprofi t 566 through under-the-table dealswithout facing the competition of other 567 major OPEC producers suchasSaudi Arabia. 568 When in mid-1985Riyadhdecided to fl ood the market of cheap oil, 569 bringing the openly failing cartel-likestrategytoanend, Tehran found

570 itself in an unprecedented situation. It was not the 1970s anymore, 571 Iranian leaders had to face the fact that oil, could meannot only wealth , 572 but alsoweakness for anation . 59 At the same time they could no longer 573 benefi tfrom acartel-likesystem they could violate though still taking 574 advantage from its role as price-setter. The display of assertiveness by the 575 Iranian leadership betweenlate 1985 and early 1986,the lack of fl exibility 576 of the issue of production and the repeated calls for areturn to high 577 prices were, to someextent, designed to convey an imageofstrength 578 while gaining time vis-à-vis Saudi Arabia and the other OPEC members. 579 Iran wasamongthe countries most affected by the declineinoil 580 prices produced by the counter-shock. The drop in its oil revenues 581 happenedtocoincidewith anew escalation of the confl ict against Iraq. 582 As aconsequenceIran found itself to be among the countries mostly in 583 need of anew system that would guarantee arise in its oil revenues. And 584 it seems diffi cult that it would have managed to stop the precipitous drop 585 in its oil revenueswithout striking adealwith Riyadh. Its support to the 586 quota systemrevealed the acknowledgment by Tehran that onlyamore 587 rigid disciplineamong the producers would guarantee priceshigh 588 enough to sustain its wareffort, awar effort in which Iran always felt 589 unjustly penalised or damaged by the support provided by the OPEC 590 Arab members to Saddam Hussein.60 In addition to that, by the mid- 591 1980s Iran was already trying to shift its pricing policy away from barter 592 deals, which over time constituted as much as 25 per cent of its exports, , 593 increasingly seen as eroding Iran scontrol over pricesand destinations as 594 well as contributing to soft marketconditions. 61 OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

Iran and the Counter-Shock: Oil as aWeapon (forSurvival) 135

595 Of course Iran was not aloneinits demandtoput an end to the free 596 fall of prices: by the summer of 1986 virtu, ally all the OPEC decision 597 makers had concluded that the market share strategywas,atleast in the ,

598 short-term, afailure . 62 Yet, as observed by Aghazadeh in June 1986 with 599 regard to the negotiation underway with Yamani: we, arethe two to , , , 600 decide . 63 Iran skey negotiator wasnot only aware of Tehran scentrality 601 in the negotiations, but also of the crucial role the country played in the

602 re-establishment of the quota system, an agreement that, in his words, , , 603 started from aproposal of Iran . 64 In the decision taken in the summerof , 604 1986, aprominentrolewas played by Aghazadeh himself. Iran soil 605 minister, who would hold the ofﬁ ce from October 1985 to August 1997, 606 had previously been an aide to the leftist Prime MinisterMir Hossein 607 Mousavi, advising him on economic and ﬁ nancial matters and arranging 608 manyofthe oil barter deals concluded by Iran in the early 1980s. During 609 the crucial months of the counter-shock Aghazadeh proved to be a , 610 versatile politician, able to translate the partial reassessment in Iran s

611 energy policy into anew course of action. In other words, if it is clear that

, , , 612 the August accord was no clear Iranian victory ,atthe same time it , 613 displayed unusual Iranian negotiating cleverness ,asuccess that many

, 614 observers attributed to Aghaz, adeh sskilful use of negotiating pressure in , 615 the conference hall and in public . 65 , , 616 In retrospect, Aghazadeh sinitiative could be seen as part of Iran s 617 steadymovement towardpolitical andeconomicpragmatism that from 618 the mid-1980s slowly replaced the ideological extremism dominant since 619 the revolution.66 Beginning in 1984 the economic policy of the Islamic 620 Republic had started to signal aprogressiveshift from the populist 621 euphoria of 1979– 80 to amore moderate approach.67 The leftist forces, 622 led by Prime MinisterMousavi, saw their powerweakeninginfavour of 623 President Ali Khamenei and Speaker of the Parliament Ali Akbar 624 Hashemi Rafsanjani, whowould soon emergeasthe major protagonist of , 625 Tehran spragmatic turn. Social spending was reduced, while many 626 voicesstarted to call for agreater role for the private sector. At the same 627 timethe domestic support for the war began to erode, prompting the OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

136 Oil Counter-Shock

628 leadership to search for measures to bring some relief to the population. 629 In 1987 the government started to seek foreign loansand committed 630 itself to amore pragmatic social and economicagenda.68 The following 631 year the long-awaitedcease- fi re brought to an end eight yearsofbloody 632 and costly confl ict andincreasedthe chances for an improvement of the 633 socio-economic situation. 634 Between 1987 and1989aseries of setbacks, fi rstand foremost theleaks 635 concerning thehostage-for-armsdealpreviouslyconcluded with 636 Washington andthe 1987 Meccamassacreduringthe annual hajj, 637 combined with thepersistence of tensionsbetween leftists and 638 conservatives, wouldmakeimpossiblefor theIranian leadership to , 639 embark in afar-reachingprogramme of reassessment of thecountry s 640 foreignand economic policy.For such ashift in policy we have to wait for , , 641 Khomeini sdeath in June 1989 andfor Rafsanjani selectionasPresident of 642 theIslamic Republic afew weekslater.Yet thepartial rapprochement 643 with SaudiArabiaonthe quotasystem, alongwiththe secret engagement , 644 with theReagan sadministrationinthe frameworkofthe Iran– Contra , 645 affair,signalled Tehran sintentionstostart revising some of thecore 646 assumptionsthathad animated itseconomicand foreignpolicyinthe 647 aftermathofthe revolution,anadjustmentthatbecameall themoreurgent 648 afterthe endofthe warwithIraq, when Iran wasfaced with themajor task 649 of reconstruction.The majoroutcomesofthisnew course wouldbethe 650 re-launching anddevelopmentoftrade relationswithWestern Europe,the 651 privatisationofmanyfactories andbusinessesthatthe statehad takenover 652 sinceafter therevolutionand thesearchfor internationalinvestments to , 653 resuscitatethe moribund oilindustry.69 Iran snew economic policy would 654 bear fruitfor afew years, before entering in anew crisis as aconsequence 655 of thenew fall in oilpricesregisteredinthe 1990s. 656 657 Notes

658 , 1. Great, Civilization ( Tamaddon– eBozorg)was the expression used by the 659 Shah in the 1970s to describe his project of development. According to the 660 Shah such project would enable Iran to match the living standards of OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

Iran and the Counter-Shock: Oil as aWeapon (forSurvival) 137

661 the West while, at the same time, proposing an alternative to Western political and economic systems.

662 , , 2. Robert Looney, Origins, of Pre– Revolutionary Iran sDevelopment Strategy , 663 Middle Eastern Studies xxi/1 (1986), pp. 104– 19: 113– 14. 664 3. Robert Graham, Iran: The Illusion of Power (New York, 1978), pp. 97– 8. 4. Ibid., p. 100. In this period Saudi Arabia consistently pursued apolicy of 665 , moderation within OPEC that contrasted with the Shah spressures 666 for higher prices. For an illustration of Saudi policy of moderation see: 667 Memorandum of Conversation, Kissinger– Yamani, Taif, Saudi Arabia, 11 September 1975, in US State Department, Foreign Relations of the United 668 States 1969– 76,Vol. XXXVII, Energy Crisis, 1974– 1980 (Washington, DC, 669 2012), p. 279. On the approach pursued by Riyadh after 1973 see, among 670 others: David B. Golub, When Oil and Politics Mix: Saudi Oil Policy, 1973– 1985 (Cambridge, MA, 1985). ,

671 5. On the 1976– 7OPEC negotiations and their impact on Iran soil revenues 672 see: Andrew Scott Cooper, Showdown, at Doha: The Secret Oil Deal , That Helped Sink the Shah of Iran , Middle East Journal lxii/4 (2008), 673 pp. 567– 91. 674 6. See: Andrew Scott Cooper, The Oil Kings: How the US, Iran, and Saudi 675 Arabia Changed the Balance of Power in the Middle East (New York, 2011), pp. 353– 87. 676 7. Pierre Razoux, La guerre Iran– Irak: Première guerre du Golfe 1980– 1988

677 (Paris, 2013), p. 564. 8. Kamiar Mohaddes and M. Hashem Pesaran, One, Hundred Years of Oil 678 , Income and the Iranian Economy: ACurse or aBlessing? , Cambridge 679 Working Papers in Economics ,Faculty of Economics, University of 680 Cambridge, February 2013, p. 10. The decision to constrain production after the revolution resulted from the intent of the new leadership in power, 681 , most notably of Abolhassan Banisadr, to reduce Iran sdependency on oil by 682 limiting its exports. 683 9. Shaul Bakhash, The Politics of Oil and Revolution in Iran: AStaff Paper (Washington, DC, 1982), p. 2. 684 10. Ibid., p. 2. , 685 11. Suzanne Maloney, Iran sPolitical Economy Since the Revolution (Cambridge, 686 UK, 2015), p. 165. 12. Hamid Algar, trans., Constitution of the Islamic Republic of Iran (Berkeley, 687 1980). 688 13. Daniel Brumberg and Ariel I. Ahram, The National Iranian Oil Company in 689 Iranian Politics (Houston, 2007), p. 17. 14. Moinfar had worked for the Planning Organization under the Shah and had 690 connections with the Liberation Movement of the moderate Prime Minister 691 Mehdi Bazargan. 15. On theeconomicpolicymakingprocess in theimmediate aftermathofthe 692 , revolution see, amongothers: Maloney, Iran sPolitical Economy ,pp. 107 – 26. 693 OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

138 Oil Counter-Shock

694 16. On this point see: Paul Vielle and Abolhassan Banisadr, Pétrole et violence, , terreur blanche et répression en Iran (Paris, 1974). On Khomeini sposition 695 on oil policy see: Ruhollah Khomeini, Neda– ye Haqq [The Voice of Truth], , 696 Collection of Speeches and Interviews Published by the Iranian Students Societies in Europe and in America (1979), pp. 206– 19. 697 , 17. Maloney, Iran sPolitical Economy,p.369. 698 18. Ibid., p. 108. , 699 19. Pakistani, Turkish, and Soviet Bloc ﬁ rms were integrated into Iran s customer base.

700 , 20. On this point see: Philip Shehadi, Economic, Sanctions and Iranian Trade , 701 MERIP Reports xi/98 (1981), pp. 15– 16.

, 702 21. Andrew Whitley, Iran, Calls in Shell and BP for Oil Supply Talks , Financial Times,5December 1979. 703 , 22. On the political and commercial implications of BP and Shell sdeals with

, , 704 Iran in 1980– 1see: FCO 8/4064 Iran, Oil and FCO 8/3638 Iranian Oil , 705 Affairs ,UKNational Archives, Kew, London. , 23. On this point see Martin Chick schapter in this volume. 706 , 24. Maloney, Iran sPolitical Economy,p.140. 707 25. Razoux, La guerre Iran– Irak,p.564. 708 26. Between 1980 and 1981 Iraqi oil annual revenues dropped from $26 billion to $8.5 billion. Razoux, La guerre Iran– Irak,p.564. 709 27. Ian Skeet, OPEC: Twenty– Five Years of Prices and Politics (Cambridge, UK, 710 1988), p. 180. 28. Bakhash, The Politics of Oil,p.34. 711 , 29. On the evolution of Iran sdomestic policy in 1980– 4see: Bahman Baktiari, 712 Parliamentary Politics in Revolutionary Iran: The Institutionalization of 713 Factional Politics (Gainseville, 1996), pp. 53– 98. 714 30. Bakhash, The Politics of Oil,p.34. 31. Shaul Bakhash, The Reign of the Ayatollahs: Iran and the Islamic Revolution 715 (New York, 1984), pp. 230– 1. 716 32. Ibid. 33. Skeet, OPEC,p.185.

717 , 34. Oil, and the Outcome of the Iran– Iraq War , MERIP Reports xiv/125– 126 718 (1984), pp. 40– 2. 719 35. Bakhash, The Politics of Oil,p.35. 36. Skeet, OPEC,p.187. 720 37. Ibid., p.188. On therhetoricemployedbythe Iranianauthorities in this phase

, 721 see: Ir, anians ChallengeOil Limits , NewYorkTimes,8November1982. 722 38. Dilip Hiro, Iran Under the Ayatollahs (London, 1985), p. 239. 39. Razoux, La guerre Iran– Irak,p.564.

723 , 40. See: Bathing, in Oil Keeps in Shape , The Economist,8September 1984. 724 41. On the differences in economic views within the revolutionary leadership 725 see, among others: Michael Axworthy, Revolutionary Iran: AHistory of the Islamic Republic (London, 2013), pp. 240– 4. 726 OCS Chapter6— 1/2/2018— NANDHINI.P— 571967— IBTauris

Iran and the Counter-Shock: Oil as aWeapon (forSurvival) 139

727 42. Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York, 1991), p. 721. 728 43. Skeet, OPEC,p.200. 729 44. Leonardo Maugeri, The Age of Oil: The Mythology, History, and Future of the , 730 World sMost Controversial Resource (Westport, 2006), p. 138. 45. Skeet, OPEC,p.208. 731 46. Yergin, The Prize,pp. 750– 1. 732 47. Skeet, OPEC,pp. 210– 11. 48. Razoux, La guerre Iran– Irak,p.574.

733 , 49. Iranian, Position Considered Key to OPEC Move Toward Compromise , , 734 Platt sOilgram News,25June 1986. 735 50. Ibid. , 51. Maloney, Iran sPolitical Economy,p.168.

736 , , , 52. OPEC, members positions begin to clarify , Platt sOilgram News,30June 737 1986.

, 738 53. John Tagliabue, Iranian, – Saudi Talks Created OPEC Pact , New York Times, 7August 1986. 739 54. Yergin, The Prize,p.761. 740 55. Skeet, OPEC,p.220. , 56. Maloney, Iran sPolitical Economy,p.169.

741 , 57. Tagliabue, Iranian, – Saudi Talks Created OPEC Pact . 742 , 58. Maloney, Iran sPolitical Economy,p.369. 743 59. Yergin, The Prize,p.732. 60. During the war against Iran, the ﬁ nancial aid from Gulf countries covered 744 , , 56 per cent of Iraq swar costs, while the country soil revenues only covered 745 for 25 per cent. Razoux, La guerre Iran– Irak,p.564. , 746 61. Maloney, Iran sPolitical Economy,p.383. 62. Yergin, The Prize,p.760.

747 , , 63. Iranian, position considered key to OPEC move toward compromise , Platt s 748 Oilgram News,25June 1986.

, 749 64. John Tagliabue, Iranian, Oil Minister in Key OPEC Role , New York Times, 10 October 1986. 750 65. Ibid. 751 66. James A. Bill, The Eagle and the Lion: The Tragedy of American– Iranian 752 Relations (New Haven, 1988), p. 312. 67. Baktiari, Parliamentary Politics,pp. 120– 4. 753 , 68. Maloney, Iran sPolitical Economy,pp. 170– 9. , 754 69. On Rafsanjani spragmatic turn see, among others: Axworthy, Revolutionary Iran,pp. 308– 10; Said Amir Arjomand, After Khomeini: Iran Under His 755 , Successors (New York, 2009), pp. 133– 48; Maloney, Iran sPolitical Economy, 756 pp. 192– 257. 757 758 759 OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

1 2 3 4 5 6 7 7 8 9 10 Iraq,Saudi Arabia, andthe 11 Counter-Shock 12 13 14 Ibrahim Al-Marashi 15 16 Introduction 17 18 Theeffects of thecounter-shock of the1980s,situated concurrently 19 within thecontextofthe Iran– Iraq war, provided an oft-neglected , , 20 impetusinthe Ba athist state sreconfi gurationofthe state-controlled 21 economytoasemi-privateone,and reveals theoften fraught relations 22 between Baghdadand Riyadh during this con fl ict, aprelude to the , 23 1990 Gulfcrisis. Domestically, thefallinoil prices reducedIraq s 24 income andits abilityto fi nance thewar independently,and during 25 this crisisIraqintensifi ed itsprivatisation campaign of state assets, 26 strengthening ties with aconstituency amongthe growing middle 27 classes, challengingthe powerofthe Party andbureaucracy.While , 28 SaudiArabia soil policy towardsthe IslamicRepublicofIranwas 29 characterised by apolicyofeconomic attrition andcontainment, the , 30 Ba athist leadership perceived that this policy wasalso directed 31 towardsIraq,despite Riyadh providingloans for theIraqi military 32 effort.While this policy mayappearparadoxical, it followed alogic of 33 weaker states,suchasSaudi Arabia andKuwait, employingeconomic OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

Iraq, Saudi Arabia, and the Counter-Shock 141

34 assets to manipulateastronger state on itsborders.The cumulative 35 effectsofthe events up to andafter thecounter-shockof1986 , 36 hindered Iraq scapabilities to self-fi nancethe waragainst Iran,and 37 resulted in therestructuring of theIraqi economy.The resultingquota 38 system establishedbythe Organization of PetroleumExporting 39 Countries (OPEC), whichIraq accused Kuwaitand theUnitedArab 40 Emiratesofviolating in thelate1980s,providedIraqwitha 41 justifi cation to invade itssouthern neighbour in 1990. , 42 During theIran – Iraq war, theBa athist government wouldbe 43 affected by divergentnationaloil strategies, particularlybySaudi , 44 Arabia.Saudi Arabia soil policy as aswing producer in the fi rst

45 half of the1980s situates Saudidecision-makingasfar back as the 46 mid-1970s within theeconomicframework of the ,dominant

, 47 producer, model, to meet Riyadh spolitical andeconomicinterests, 48 by maximising thelong-term economicvalue of Saudioil,and , 49 consolidating itsdomesticsurvival. Determinants of SaudiArabia s 50 oilpolicyinthe preludeand course of thecounter-shockcould have 51 been mutually reinforcing, such as thegeostrategic environment and 52 domestic economicand politicalimperatives. Concurrently, Saudi 53 policy also sought to weaken therevolutionary zealand military 54 offensive of Iran.However, Saddam Husseinand hisministers 55 perceivedthispolicyasalsoseekingtoweaken Iraq militarily, but , 56 yetkeepingitsolvent to surviveintactasstate to withstand Iran s 57 military offensive. 58 Thereare few primary sources to indicate the causal relationship 59 between the counter-shock andtransformations in Iraq – as ﬁ les from 60 the Ministry of Oil remained in Iraq, unlike the thousands of military 61 and security-related documents that were captured and taken to the 62 UnitedStatesafter 2003. Those documents reveal tensionswith Saudi , 63 Arabia over its oil policy, and demonstrate Baghdad sfear of an Iranian 64 victory and the fall of Basra during the year 1986, resultinginthe , 65 transformation of Iraq sdomestic economicand power structures, and 66 new strategies to bring the war to an end. OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

142 Oil Counter-Shock

67 1980–6:Prelude to the Oil Counter-Shock 68 , The destruction of Iraq soil exporting facilitiesduring the ﬁ rst months of 69 the war resulted in Baghdad producing less in amarket where prices were 70 , , decreasing. By the time of Iraq sinvasion of Iran, Saudi Arabia s 71 , production constituted 62 per centofthe Middle East soil output, 72 representing an increase of more than 20 per cent since 1978, 73 contributing to the 1981 glut that hurt Iraq when 40 percent of its annual 74 budget was spent on the wareffort.1 As of August 1980, before the 75 , , commencement of the war, Iraq soil output was 3.4 mb/d.Iran sability 76 , to destroy Iraq soil facilities from the southern ﬁ elds and harbours on 77 the northern edge of the Gulf,2 led to adrop down to 900,000 b/din 78 , 1981.3 Iraq soil revenuecollapsed from $26 billion in 1980 to $10 billion 79 in 1981, adrop of 60 per cent.4 80 Iraq would criticiseSaudi Arabia for the early oil glut, which the 81 Kingdom acknowledged wasofits own making. In April 1981 Ahmed

82 ,

Zaki Yamani, the Minister of Oil, granted an interview with NBC s Me, et

, the Press ,claiming credit for the glut: Well,, as amatter of fact, this glut 84 was anticipated by Saudi Arabia and almost done by Saudi Arabia. If we 85 were to reduceour production to the level it was at before we started 86 raising it, there would be no glut at all. We engineered the glut and want

87 to see it in order to stabilise the price of oil., 5 However the stabilisation 88 Saudi Arabia sought soon becameamatter outside of its control, as 89 Abbas Alnasrawi writes: 90 91 But this policy of overproduction exerted downward pressure on 92 market prices over which the Saudis had no control. Although the 93 Saudi government believed that it could stabilize the ofﬁ cial price 94 of oil through the manipulation of its output and that the glut was 95 atemporary phenomenon that would disappear in mid-1982, the 96 behavior of other oil producers proved the Saudis to be wrong.6 97 98 Nonetheless, Iraq perceived the glut as Saudi-driven,asdemonstrated a 99 few months later in aJuly statement by Saddam Hussein: OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

Iraq, Saudi Arabia, and the Counter-Shock 143

100 We direct ourfriendly butalsoserious criticismtowardsomeArab 101 brothers whoseproductionand marketingpolicieshaveled to the 102 creation of aglutinthe oilmarket. We cannot possibly ﬁ nd convincing argumentsinfavourofthispolicyand itsgoals.Its 103 harmfuleffects upon theAraboil producingstatesand others is very 104 clear. If some oilproducingstateshave ﬁ nancialsurpluses,wedo 105 notall possesssuchanaccumulationofwealth. We also do notsee 106 anywisdominproductionthatleads to aglutinthe oilmarket.7 107

108 Hussein did not explicitly refer to Saudi Arabia, and offeredhis

, 109 statement in the form of constructiv, ecriticism most likelyout of

110 diplomatic sensitivities. At the time he framed Iraq spositionduring the

111 warasthe eastern, ﬂ ank of the Arab world, evidentinthe following 112 statement: Iraq, is building an army not to defend just its own borders,

113 but to serveasthe shield and sword of the Arab nation againstits

114 enemies., 8 Nonetheless aharsher statement followed in September1981, 115 when Tayih Abd, al-Karim,Iraqi Minister of Oil and member of the 116 Revolutionary CommandCouncil (RCC), said the following: 117 , 118 That country spolicy of continuing its high output beyond its 119 needs is suicidal and cannot be explained in any terms other than 120 the desire to harm others [ ... ]Were it not for the oil glut, which 121 may have been inspired and planned to prolong the Gulf War and 9 122 wear down Iraq, the Gulf War would now be over. 123 , 124 Within the span of April to September 1981, Saudi Arabia soil minister , 125 had taken creditfor the oil glut, and Iraq soil minister had issued a 126 strongly worded statement in response to this policy.Saudi oil policy 127 during the war to both belligerents was that of containment and attrition, 128 evenitachieved this policy with differing means to both parties.The 129 Iraqi Oil Minister, exactly one year into the war, stated openly that , 130 Riyadh spolicy wastoprolong the war. From aSaudi perspective, at this 131 juncture, the warwas weakening two hegemonic states in the region, and 132 suitedits interests. OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

144 Oil Counter-Shock

, 133 This exchange in 1981 remained embedded in Iraq shistory of the 134 confl ict as late as 1987,seven yearsinto the war, an indication that the oil , 135 glut had been considered asignifi cant event from Baghdad sperspective. 136 In May 1987 the Iraqi General Military Intelligence Directorate 137 conductedaninstitutional book-length assessmentofthe war. Chapter 138 two of this history acknowledged that the Arab Gulfstates had provided 139 fi nancial aid to Iraq but complained that more aid should have been 140 forthcoming. The report then referred to the 1981 statement by the Iraqi 141 oil minister that the excess in Saudi oilproduction was meant to extend 142 the duration of the war so as to weaken Iraq.10 , , 143 In April1982 Syria, Iran sally during thewar, closed Iraq soil 144 pipelinesgoing throughits territory to Baniyasonthe Mediterranean. , 145 Iraq soil facilities in thewar theatreinthe vicinity of Basra hadbeen 146 destroyed and the fi ghting prevented the ability of Iraqioil to be 147 shippedvia Gulf outlets.Closing this pipeline deprived Iraq of an 148 export outlet of 400,000 b/d, representingone-fi fth of itstotal oil 149 exportsprior to thewar.11 In theIraqiMilitary Intelligence historyof 150 thewar, theclosing of thepipelinewas retaliation, situated in ahistory , 151 of antagonisticrelationswiththe Ba athinSyria,including thefailure

152 of the1979 uni fi cation plans, whichthe author blamed on aSyrian 153 conspiracy againstthe Iraqigovernment, andDamascus, declaration of 154 support of thenew government in Tehran andthe overthrowof 155 theShah. Thereport went on to blame Syriafor thebombing of the , 156 IraqiembassyinBeirut in December 1981.12 Syria sclosure of the , 157 pipeline causedIraq soil revenue to fall,and in aggregatetermsoverall, 158 they declined from$29 billion in 1980 to $7 billion by 1983.13 159 Itsforeignreservesofsome$35 billion priortothe war declined rapidly 160 to $3 billionby1983.14 , 161 The Iraqi view of the Saudi glut, followed by Syria sclosure of the 162 pipeline, in both public statements and confi dential documents, invoked 163 aform of resource nationalism, however not in the traditional sense of , , 164 the foreignexploitation of oil and anation ssovereignty. Rather,Iraq s 165 portrayalofthe warasadefenceofthe eastern fl ank of Arab nation was OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

Iraq, Saudi Arabia, and the Counter-Shock 145

166 redolent in the language of qawmiyya,the notion of nationalism on

167 behalf of an Arab ethnie. Thusany action taken by the Arab states to

, 168 affect the price of Arab, oil or shut down the ﬂ ow of Araboil, as Syria 169 did,was perceivedbyIraq as ameans to sabotage its war against Iran. 170 The critique lodged by Iraq was that Arab states pursued narrow interests 171 of wataniyya,the nationalism that corresponds to anation-state. Iraq , , 172 developed an argument that Saudi Arabia srole in the oilglut and Syria s 173 closure of the pipelinewere examples of the pursuit of national self- , 174 interest instead of Iraq sgrandiosepan-Arab war againstIran. 175 Theclosure of theSyria pipeline made Baghdad more dependent on 176 anon-Arab country,Turkey,which in thepast haddisputed the , 177 demarcation of Iraq snorthern border. Iraq became dependent on its 178 pipeline throughTurkey,which moved750,000 b/d, representingone- 179 fourth of its exportcapacity just before September1980.15 With the 180 construction of asecond pipeline thecapacity of theTurkish pipeline 181 would eventually double. In return, Turkey hadthe politicalcover to , 182 unilaterallyattack theKurdistan Workers Party (PKK)basesinthe 183 north of Iraq, withouteveninforming Iraq or askingits permission.16 184 To compensate for the loss of the Syrian outlet, Iraq was able to build 185 apipeline through Saudi Arabia.17 This pipeline, together with the , 186 pipeline across Turkey, increased Iraq sexport capacity to 2.4 mb/d by 187 1989.18 Thus, after the construction of new pipelines from Iraqi ﬁ elds to , 188 Saudi Arabia, the war would further link Iraq ssovereign resource, oil, on 189 relations with Turkey, Saudi Arabia and Kuwait,19 while Kuwait also

190 provided trans-shipping of Iraqi oil.20 Saudi Arabia and Kuwait also

, 191 provided 330,000 b/d from the shared neutra, lzone to compensate for , 192 Syria sclosure.21 The geostrategic strategyofdiverting oil ﬂ ows to Saudi 193 Arabia and Kuwait would serve the policy of thesetwo Gulf states, 194 making their stronger northern neighbour, which at times had revisionist 195 claims vis-à-vis Kuwait, more dependent on them for oil outlets and , 196 ﬁ nancial subsidies. Iraq srent-seeking abilities would now dependonthe 197 acquiescence of its weaker neighbours to the south, granting them 198 asymmetric power over Saddam Hussein. OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

146 Oil Counter-Shock

199 At this point in the Iran– Iraq war the Iraqi state tried to insulate 200 Iraqi society from the confl ict, according to the history produced by the 201 Military IntelligenceDirectorate.22 In the fi rst years of the war the Iraq 202 state engaged in apolicy of guns and butter, and lavish spendingon 203 development programmes, including an underground metro system. 204 Financial support from other Arab countries, particularly Saudi Arabia 205 and Kuwait, made it possible for the government to pursue this policy, , 206 but would have to be curtailed as aresult of Gulfstates complaints of 207 misappropriatingtheir loans.23 Domesticconsent, by insulating Iraqi , 208 society from the war, was dependentonIraq sGulfneighbours, 209 furthering Iraqi domestic regime security on fi nancial fl owsfrom these 210 two states, and allowing them input on how Iraq made sovereign 211 decisions on its owndevelopment plans. 212 The loansfrom the Arab Gulfstates such as Saudi Arabia and Kuwait 213 transformedrelations with Iraq. In 1979 Iraq had opposed any regional 214 alliance in the Gulf, since it sought to be the hegemoninsuch asecurity 215 arrangement. The GCC had not invited Iraq to become amember,and 216 additionally made Iraq dependent on them economically, precluding 217 Iraq from acting as the Arab hegemoninthe Gulf. By the time the 1986 , 218 oil counter-shock occurred, Iraq swar effort had becomedependenton 219 its relations with Saudi Arabia. , 220 This relationship not only had an effect on Iraq sregional posture,it 221 also had ramifi cations on the international level. As of 1982, Iran had 222 taken the war onto Iraqi soil, and by 1984 threatened to cutIraq in half as 223 it approached the Baghdad– Basra highway. The fear of Iran dominating 224 the supply of oil was anightmarescenario for both Riyadh and 225 Washington, not onlybecause of the implications for the oil market, but 226 Tehran would havebeen in astronger position to export the Islamic 227 Revolution throughout the Middle East. 24 The United States up to 1984 228 had acquiesced to awar of attrition between Iraq and Iran as ameans 229 to weaken two anti-Americanstates in the region. The war prior to 230 1984 reduced the amount of oil to both states,and maintainedthe status 231 quo of Saudi Arabia as the swing producer. By 1984,the Reagan OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

Iraq, Saudi Arabia, and the Counter-Shock 147

, 232 administration formalised the tilt, in favour of Iraq by establishing , 233 diplomatic relations, and later providing satelliteintelligence to Iraq s 234 militaryonIranian militaryformations.25 235 236 The 1986 Counter-Shock 237 Between 1981 and 1985 Saudi Arabia and Kuwait, which had the largest 238 outputcutbacks,experienced the sharpest revenue declines within 239 OPEC, as the price of oil declined by nearly 40 per cent. OPEC had 240 introduced acollectivequota in meetingsin1982 and 1983 and as a 241 , result Saudi Arabia soutputwent to 2mb/d.26 The market conditions 242 prior to the 1985 annualOPEC meeting led to aprice decline, and as 243 OPEC had maintainedits ofﬁ cial price of $28 abarrel, its members 244 , endured an increasingly smallershare of the world market sdemand. 245 Non-OPECproducers lowered their prices, expandingtheir market 246 share.Inregards to this period,aBrookings Institute Paper wrote,

247 It, seemed unlikely in 1985 that Saudi Arabia would break with the rest of 248 OPEC and take the high-proﬁ le, politically riskystrategyofforcing a

249 pricecollapse, . 27 However, in July 1985 Saudi Arabia threatened to raise 250 its output as high as 9mb/d unless other OPEC members agreed to end 251 discounting pricesand cheating on production quotas.28 The OPEC 252 conference of October 1985 failed to conclude with an agreement on oil 253

quotas. Saudi Arabia and its Gulf alliessought to adoptastrategy to

254

, maximise market share, seeking its fair, share of the oil market and let 255 prices fall. As aresult of this meeting OPEC members could not reach a 256 consensus on setting offi cial prices for crude oil, and abandonedany 257 restraint on output. 258 Saudi Arabia increased production in 1986 from 2mb/d to 259 4.5 mb/d.29 The price fell from $29 per barrel in 1983 to less than 260 $10 per barrel (at one point $7 per barrel) in 1986.30 The price fell in the 261 fi rst half of 1986 by more than 50 per cent, but the Arab Gulfstates did 262 not incur asignifi cant loss in revenue, as the price decline wasoffset by 263 their increasesinoutput.31 Duetoarrangements with its Gulf neighbours 264 OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

148 Oil Counter-Shock

, 265 and Turkey, Iraq soil production had in fact increased by 18 per centin 266 1986 over 1985 levels, but its oil export earningsdecreasedby27.2 per 267 cent. To situate this effect in the longterm within the backdrop of the , 268 war, Iraq soil revenuedeclined from $26.1 billion in 1980 to $10.4 billion

269 in 1981 to $6.9 billion in 1986.32 When writing about the Iraqi debt as of 270 1980, one analysts conﬁ rms: The, ﬁ nancial situation in 1986 deteriorated

271 even further, with that year provingtobeaﬁ nancial disasterdue to the 272 collapse of oil prices., 33 Iraq had to wage awar while facedwith declining 273 purchasingpower, due to the collapsed oil prices and weakened US 274 dollar, and sought out new credit and guaranties, and debt rescheduling 275 Iran believed that Saudi Arabia sought to further cripple the Iranian 276 war economy by driving the price of oil down.34 By the winter of 1986to 277 1987, the Iranian military had captured the Faw Peninsula in Iraq and 278 launched an offensive on Basra. A1986 Iraqi intelligence document 279 writes disapprovingly of the Iranian push to invadethe city and declare

, , 280 an Iraqi, Islamic Republic in Basra creating,inthe document swords,

, , 281 aS, hi aRepublic . 35 The Iraqi intelligence reportscouples this campaign 282 with the counter-shock, andhighlights how the decline in prices were of ,

283 concern to Iran. Mohsen Rafi ghdoost, afounderofIran sRevolutionary 284 Guards, in ameeting with Abd, al-Halim Khaddam, foreignminister 285 of Syria, asked him to mediate with Saudi Arabia that it not increase 286 oil production at the OPEC meeting scheduled for October 1986. , 287 The Iranian fear was that Saudi Arabia sdecision would lead to the price 288 per barrel falling below$10. According to this Iraqi assessment, if this , 289 were to occuritwould hurt Iran swar effort.36 The report indicated that 290 the drop in oil priceswas infl icting the desiredeffect on Iran, without 291 acknowledging how the price decrease affected Iraq itself. 292 The counter-shock of 1986, coupled with the Iranian victories in the , 293 Basra theatre and mounting foreign debt accelerated Saddam Hussein s 294 implementation of changes in economicpolicy. 37 While writing ahistory 295 of the effects of the counter-shock, it is diffi cult to ascertain whether the , 296 fall in oil priceswas the causal factor in the restructuring of Iraq s , , 297 economy.The Party sof fi cial title was the ArabSocialist Ba athParty. OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

Iraq, Saudi Arabia, and the Counter-Shock 149

298 In the ﬁ rst years of the war, Saddam Hussein opened asession of the

, 299 RCC declaring: Ou, rparty rejects the capitalistic way towardprogress , 300 and proceededtohave the membersextol the positivevirtues of 301 socialism over capitalism. 38 Nevertheless, due to the conditions of the 302 war, an economicpolicy was announced in aJuly 1982Baath Party , 303 conference that Iraq sstate-run economy would foster the private 304 sector.39 It is onlyin1986 that the impetus for such changes occurred, 305 indicating that the precarious economicstatuscombined with setbacks 306 on the battleﬁ eld provided the ﬁ nal prod to enactthese changes. While in 307 the early period of the war the state pursued an egalitarian policy of guns 308 and butter, the end of the war for Iraq resulted in arising entrepreneurial 309 class and privation amongstate employees. 310 In early1987 the Iraqi stateimplemented liberalisation and ,

311 privatisationpolicies,inaugurated by Saddam Hussein sstatement

312 that ,all activities of theprivate-sector form part of thenationalwealth, 313 andare as important as theactivitiesofthe socialistsector , . 40 The 314 state would continue to maintain control over criticalindustriessuchas 315 thehydrocarbon sector, armaments, steel production,banking 316 andpublicutilities. It would privatisefactories, 47 in total, notrelated 317 to the aforementioned sectors, such as foodstuffs, textiles,aluminum 318 andplastics.State-owned hotels,supermarkets, andgas stations were 319 sold off,aswell as farmstoencourage privateagriculturalventures, 320 where entrepreneurscould sell producedirectlytowholesalers. 321 It enacted laws to lift the ceilingonprivate investment, encouraged 322 Arab capitalinvestment coupled with Iraqiprivate capital, granted tax 323 concessionsfor import of rawmaterials,decriminalised theuse of 324 foreign-heldaccounts to import goods, and allowedprivate 325 entrepreneurs to export goodsaslongastheytransferred 60 percent

326 of theirvaluebacktoIraq. 41

, 327 Thesechanges coincidedwithan ,administrative revolution 328 ( thawra idariyya )intended to reduce the powersofthe bureaucracy by 329 eliminating the hurdles of red tape needed to navigate the complex 330 apparatus that governed the economy.These changes would threaten the OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

150 Oil Counter-Shock

, 331 Party spower, as its members controlledmost of the senior positions in 332 the civil service.42 Economic deregulation represented the abandonment , 333 of early Ba athist socialist ideology, while streamlining the bureaucracy as 334 aresult would weaken the power of the Party members. The period from 335 1986 onwards representsajuncture of the warinterms of the 336 reconfi guration of domestic constituencies, where the power of Party 337 offi cials and bureaucrats vied for infl uence alongside arising middleclass

338 and entrepreneurial elite. 339 The war resulted in the rise of what has been termed a contrac, tor

, 340 bourgeoisie, ,within Iraq srentier state structure.Ifthe state was the ﬁ rst

341 level in this structure,projects paid by the state from oil revenues

, 342 ﬁ nancedthe second levelofthis contrac, tor class. Al-Khafaji tracesthis 343 second level to constituencies in Anbar, which happenedtobeArab 344 Sunni, and Salah al-Din provinces, where families happened to share a 345 primordial connection with Hussein. However,this structure did not ﬁ t , 346 neatly along regional or sectarian lines, as Shi afamilies and personalities 347 were alsoinvited to take part in these economic activities.43 In the 348 context of the oil shock years, Saddam Hussein had enabled asystemof

349 crony capitalism.Inone meetingwith the representatives of this group,

350 he warned: The, private sector and owners of relatively big capital are

351 facing atest at this stage. , 44 The Iraqi president in this statement

, , , 352 acknowledged that a priv, ate sector and big capital existed, and that his 353 reforms had taken root in Iraqi society,anindirectrepudiation of tenets , 354 of the original Ba ath ideology. 355 In exchange formakingaconcession that contradicted theideological 356 core of theParty,hedemandedaform of monetary obedience, urging that 357 thegroup providemoredonations to thewar effort: 358 359 You know that there was only ahandful of contractors before the 360 revolution [the 1968 coup] [ ... ]Now, this contractor owns not

361 thousands [of Iraq dinars] but millions [ ... ]Iwas informed that he had donated only apittance. He did not ask himself, Where, did

362 , Iget this fortune? Isn titthanks to these new circumstances?, 45 363 OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

Iraq, Saudi Arabia, and the Counter-Shock 151

, 364 Saddam Hussein sstringofrhetoricalquestions highlights thepatronage 365 bargain. He hadallowed aprivate sectorto fl ourish to enable a 366 constituency to generate wealth more effi ciently; howeverthe bargain 367 impliedthatthe statewas engagedinaform of protection racketeering. 368 Thestate protectedthe population andeconomy from an Iranianinvasion 369 andthe newentrepreneurial classhad to payfor this service. Thecoercive 370 instrumentsofthe state stillremainedparamount,and theimplied threats 371 of thefailure to donate wouldhavebeenapparent. In August 1986 six 372 businessmenwereexecutedoncharges of corruption. 46 Aneo-patrimonial 373 groupwas allowedtoadvance theireconomicinterests duetowartime 374 contingencies, buthad to remain loyal, in monetary terms, to theleader 375 whomadetheir fi nanciallargessepossible. 376 It was the same protection-racket logic that Iraq conveyedtoits 377 southern neighbours, Saudi Arabia and Kuwait. As the eastern fl ank 378 protecting them from Iran andthe Islamic Revolution, both states had to 379 provide protection money for this effort, as evident from the following 380 statement Saddam Hussein made in 1983: 381 , 382 All the Gulf countries are aware of Iran sambitions in targeting 383 them [ ... ]They know that had it not been for Iraq, they would 384 have been taken as prisoners to the land of the Persians [ ... ] 385 Ithink they know that, and if they do not, than that is an even graver problem.47 386 387 The Iraqi state sought out private subsidies from its public and the Gulf 388 states as its ownability to generate revenue had been hindered as aresult 389 of the oil glut. 390 The counter-shock also coincided with an Iraqi strategic air 391 campaign againstIranian oil facilities, seeking to leverage the fall in oil 392 prices in order to cripple the Islamic Republiceconomically, compelling 393 , the leadership in Tehrantodeclare acease- fi re. Iraq sair force at this 394 point was able to conduct mid-airrefuelling so that it could carry out 395 long-range sorties to reach distant Iranian oil terminals in the Gulf, such 396 OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

152 Oil Counter-Shock

, 397 as Bushehr. Iran smain oil facilities were working to full capacity, 398 contrary to Iraq whose production and revenueshad already declined , 399 sharply. Iraq initiatedastrategytocripple Iran sfacilities as of April 400 1986.48 According to an October 1986 document, the Iraqi air force had

401 taken outthe Iranian oil loading facilities on Kharq Island.49 This year 402 also witnessedthe intensifi cation by both belligerents, direct attacks on 403 seaborne trade,and the volatility in the naval theatre of the war led to 404 the internationalisation of the confl ict, when Kuwait played off the 405 superpowers in calling for them to refl ag its oil vessels, which the United 406 States ultimately agreed to do. , 407 Iraq was critical of Saudi Arabia srole eventhough it also hurt Iran. , 408 Riyadh allayed Baghdad sfears, assuringitofcontinued fi nancial 409 support, and both Kuwait and Saudi Arabia provided new loans.50 410 Unlike in the early 1980s, there are few public statementseither 411 condemning the Saudi role in the counter-shock. In 1981 Iraq held out 412 the possibility of winning awar with Iran and wasinapositiontoopenly 413 criticise Riyadh. The duration of the Iran– Iraq war resulted in aloss 414 of an estimated 4.1 billion barrels of oil Iraq could haveproduced, 415 equivalent to deprivingitof$230 billion in revenue.51 The last two years , 416 of the warincreased Iraq sdebt to Saudi Arabia and Kuwait, estimated at 417 $40 billion, eventually emerging as oneofthe catalystsleading to the 418 1990 invasion of Kuwait.52 419 , 420 1988–90: Iraq sInterwar Period 421 Despite the restructuring,after the war amixed economy emerged, with 422 , privatisation producing mixed results, but the state sroleinthe economy 423 , still remained dominant, an indication of the nation sdependence on oil 424 , income.53 Iraq sability to recover economicallyand maintain political 425 stability after the eight yearsofwar would dependonits OPEC quota and 426 its ability to renegotiate debtpayments to international and regional 427 , creditors.54 Iraq soil revenue was essential for servicingits debt,the basis 428 , of its creditstanding, which was necessary for new loans. Iraq spriority 429 OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

Iraq, Saudi Arabia, and the Counter-Shock 153

430 wasthe debtsitowed to OECD states and banks, close to $35 billion, and 431 thenthe $11 billion it owed to the USSR, but its greatest debts were to 432 Saudi Arabia and Kuwait. However, Arabcreditors had no effective 433 means of enforcing repayment. 55 434 Besides its debts,Iraq depended on oil incometopay for imports, as , 435 70– 80 per centofIraq sfoodsupplies camefrom foreignsources. The 436 economic restructuring during the war resulted in infl ation at 45 per cent 437 by 1990,and those on fi xed incomes, like the vast body of government 438 employees, were particularly vulnerable. Before the mid-1980s the state 439 provided secure employment and subsidies. After the war unemploy- 440 ment grew, and the state sought to encourage the womenwho replaced , 441 the men on the front lines during the war to return home.56 Iraq ssociety 442 facedunemployment, infl ation, and the failure of the government to

443 deliver on promises of political liberalisation in 1989. 57 To make matters

444 worse, as the Slugletts wrote, the, rich got richerand the middle and 445 lower classes got poorer, . 58 446 In terms of paying backthe debts to these Arab Gulf states, Saddam

447 Hussein invoked the narrative of Iraq ssacriﬁ ces on behalf of the defence

, 448 of the, Arab nation .Asof1990 the decline in oilpricesprovoked the 449 Iraqi government to brandish its military power to encourage both debt , 450 forgiveness and the Gulf states adherence to ahigher oil price. Despite 451 the crucialrole oil income played in its recovery, the Iraqi state did not 452 havedirect control over its price and volume. 453 The1986price collapsehad forcedOPECinOctoberofthe same 454 year to return to itsquota system, andanagreed upon referenceprice 455 of $18 perbarrel. This pricehad been reachedbythe OPECmembers as 456 aconsensus ﬁ gure that was theagreed upon minimumfor each of , 457 its nations social and economic development plans. This agreement , 458 linkedeachmembercountry seconomic andsocialdevelopment to a 459 minimum priceand level of output forthe globalmarket.Ifany nation 460 defected fromthisagreement andviolated the quota, resultingina 461 priceofoil less than the$18 benchmark, thedefectorwould enhance its , 462 market share at theexpense of fellow producers economic andsocial OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

154 Oil Counter-Shock

463 development goals.59 This arrangement provided Iraq withjustiﬁ ca- 464 tionsfor its diatribedirected towardsKuwait andthe UAEduringthe , 465 preludetothe Gulf crisis.Iraq sargumentwas that deviationbyany , 466 onecountry in this cartel wasdetrimentaltoIraq sincomethatwas 467 need for reconstruction after awar it launchedonbehalfofthe Arabs. 468 Theprice perbarrel haddeclined just ayearafter the 1986 agreement, 469 averaging $16.92 perbarrel in 1987; $13.22 in 1988; and$15.69 in 1989. 470 Theprice increased upwardand by January1990 reached$19.98 per 471 barrel, butKuwait andother producers increased output,resultingin 472 theprice falling to $14.02inJune.60 Forevery $1 decline in theprice of 473 oilitwas estimated that Iraq lost $1 billion peryear.61 Thesuddenprice , 474 decline of 30 percent eliminated aportionofIraq santicipated oil 475 income,which it desperatelyneeded forits reconstruction,while it 476 wasconcurrentlyengaginginanambitious rearmamentprogramme, 477 including investing $10 billion in its nuclearprogramme to counter , 478 Israel snuclear arsenal. 62

479 Thedifference in oilpolicies at this junctureemerged as Saudi

, 480 Arabia, Kuwait,and theUAE were ,output maximisers ,who sought to 481 increase output even if this increase meantlowerprices. Allthree states 482 hadsmall populationsand vast reserves, thus they were lessdependent 483 on price.63 Iraq was notalone in demandingadherence to thequotas,

484 whichincludedits former adversary Iran,and Venezuela, Algeria,

, 485 Libyaand Nigeria, allofwhich were ,pricemaximisers ,prioritising 486 short-term cash infusionsand seeking to stretch their oilreservesby 487 lowering output. 64 Iraq, even if it wanted to increase output,could not 488 do so as itsoil facilities were beingrebuilt andexportoutlets were 489 severelylimited.The narrow Shattal-Arab wasun-navigableasaresult , 490 of theships sunk duringthe war.65 Iraq sprecariousgeographical 491 situation, combined with itsdireeconomicsituation,demonstrated 492 to theleadershipits vulnerability,mostly like inﬂ uencing Saddam , 493 Hussein scalculationsonthe eveofthe invasion of Kuwait, and in a , 494 single dayon2August1990 he eliminated Iraq s ﬁ nancial and 495 geographic bottleneck. OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

Iraq, Saudi Arabia, and the Counter-Shock 155

496 Conclusion 497 In termsofthe international history of theregion, theSaudi oil policies 498 precedingand during thecounter-shockstrained relationsbetween the 499 , , two states, despiteRiyadh ssubstantial loans to subsidise Iraq swar 500 , effort.Riyadh spolicy of containment, attrition,and subsidiespaid 501 dividendsinthe short-term perspectiveofthe Iran– Iraq war,by 502 preventing Iraq fromemergingasamilitary hegemonthatcould 503 pressureSaudi Arabia, andalso prevented Iraq fromrealising itsfull 504 , oil capacity,challengingRiyadh srole as theswing producer. Saudi 505 oil policy in theearlyeightiesand during thecounter-shockhurt 506 , Iraq sability to self-fi nance thewar, while simultaneously makingit 507 dependent on SaudiArabia andKuwait for fi nanciallifelines, bothin 508 termsofloans and pipelinesduringthe Iran– Iraq war.The war created 509 amutualdependency betweenIraqiand itsGulfneighbours, thelatter 510 fearinganIraqicollapse on theirborders.Saudi Arabia andKuwait 511 committed themselvesto fi nancially supporting Iraq, whilemaintain- 512 ingtheir autonomy to set theprice of oilthatbenefi tted theirdomestic 513 agendas. Thecounter-shockwould result in an IraqidebttobothSaudi 514 Arabia andKuwait, complicating thetransition from awar to a 515 peacetime economy.The ability of states like Saudi Arabia andKuwait 516 to set oilpolicies, wouldbewhatIraqessentially repudiated and 517 retaliated againstin1990 by invadingits southern neighbour, Kuwait, 518 and by menacing Saudi Arabia with afailedinvasion of theSaudi town 519 of Khafji during theGulfWar andwiththe launching of Scudmissiles 520 on itsterritory. 521 522

523 Notes

, 524 1. Nida Alahmad and Arang Keshavarzian, AW, ar on Multiple Fronts , Middle 525 East Report 257 (Winter 2010), pp. 16– 28: 25. 2. Conﬂ ict Records Research Center (CRRC), SH-GMID-D-000– 265, p. 12. 526 3. Ibid. 527 4. AbbasAlnasrawi, TheEconomy of Iraq:Oil,Wars, Destructionof Development andProspects,1950 – 2010 (Westport, 1994), p. 88; andAbbas 528 OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

156 Oil Counter-Shock

, 529 Alnasrawi, Iraq sBurdens:Oil,Sanctions,and Underdevelopment (Westport,

2002), p. 62.

530

, 5. Abbas Alnasrawi, Economic, Consequences of the Iraq– Iran War , Third 531 World Quarterly viii/3 (1986), p. 890.

532 6. Alnasrawi, The Economy of Iraq,p.84.

, 7. Alnasrawi, Economic, Consequences ,p.889. 533 8. Shahram Chubin and Charles Tripp, Iran and Iraq at War (Boulder, 1988),

534 p. 140.

, 535 9. Alnasrawi, Economic, Consequences ,p.890. 10. CRRC, SH-GMID-D-000– 265, p. 10. 536 11. Alnasrawi, The Economy of Iraq,p.88.

537 12. CRRC, SH-GMID-D-000– 265, p. 20.

538 13.Marion Farouk-Sluglett andPeter Sluglett, ,Iraq since1986: The

Strengthening of Saddam, , Middle East Report 167 (1990), pp. 19– 24: 21.

539 14. Glen Rangwala, The, Finances of War: Iraq, Credit, and Conﬂ ict, September 540 1980toAugust1990 , ,inN.Ashtonand B. Gibson (eds), The Iran– Iraq War: NewInternational Perspectives (Londonand NewYork, 2014), 541

pp. 92– 106: 96.

, 542 15. Alnasrawi, Economic, Consequences ,p.876. 543 16. CRRC, SH-GMID-D-000– 265, p. 23. 17. Ibid., p. 13.

544 ,

18. Alnasrawi, Iraq sBurdens,p.16.

, 545 19. Ahmed M. Jiyad, An, Economy in Debt Trap: Iraqi Debt 1980– 2020 , Arab 546 Studies Quarterly xxiii/4 (2001), pp. 15– 58: 17. 20. For abreakdown in Gulf loan payments and the role of Saudi and Kuwaiti

547

transshipment of Iraqi oil see Gerd Nonneman, The, Gulf States and the 548 Iran– Iraq War, ,inL.G. Potter and G. Sick (eds), Iran, Iraq, and the Legacies

549 of War (Gordonsville, 2004), pp. 167– 93.

, 21. K. Coates Ulrichsen, The, Gulf States and the Iran– Iraq War ,inAshton and 550 Gibson (eds), The Iran– Iraq War,pp. 109– 24: 116.

551 22. CRRC, SH-GMID-D-000– 265, p. 12.

, , , 23. Alnasrawi, Economic, Consequences ,p.875; and Rangwala, The Finances , 552 p. 98. 553 24. Phebe Marr, The Modern History of Iraq (Boulder, 2012), p. 193. 554 25. CRRC, SH-GMID-D-000– 265, pp. 27– 8. 26. Morris Adelman, The Genie Out of the Bottle: World Oil Since 1970 (Boston,

555

1995), pp. 207 and 213.

, 556 27. Dermot Gately, Lessons, from the 1986 Oil Price Collapse , Brookings Papers 557 on Economic Activity xvii/2 (1986), pp. 242 and 260. 28. Adelman, The Genie,p.223.

558 , 29. Farouk-Sluglett and Sluglett, Iraq, since 1986 ,p.20.

559 30. Alnasrawi, Iraq sBurdens,p.30.

, 31. Gately, Lessons, ,pp. 237– 8. 560 , 32. Alnasrawi, Iraq sBurdens,pp. 16 and 27. 561 OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

Iraq, Saudi Arabia, and the Counter-Shock 157

562 33. Jiyad, An, Economy ,pp. 17– 18.

, 34. Ray Takeyh, The, Iran– Iraq War: AReassessment , The Middle East Journal 563 lxiv/3 (2010), pp. 365– 83: 375. 564 35. CRRC, SH-MISC-D-000– 449, pp. 1and 33.

565 36. Ibid. 37. Abbas Alnasrawi, Iraq:, Economic Consequences of the 1991 Gulf War and

566 Future Outlook, , Third World Quarterly xiii/2 (1992), pp. 335– 52: 338. 567 38. CRRC, SH-SHTP-A-001– 323. 568 39. Chubin and Tripp, Iran and Iraq at War,p.112. 40. Alnasrawi, The Economy of Iraq,p.98.

569 41. Farouk-Sluglett and Sluglett, p. 22.

570 42. Robert Springborg, In, ﬁ tah, Agrarian Transformation, and Elite Consolida-

571 tion in Contemporary Iraq, , Middle East Journal xl/1 (1986), pp. 33– 52: 51.

43. Alahmad and Keshavarzian, AW, ar on Multiple Fronts ,p.19.

, 572 44. Isam al-Khafaji, State, Incubation of Iraqi Capitalism , Middle East Report 573 142 (1986), pp. 3 – 9: 4. 45. Ibid. 574 46. Chubin and Tripp, Iran and Iraq at War,p.114.

575 47. Ibid., p. 153.

576 48. Farzin Nadimi, The, Role of Oil in the Outcome of the Iran– Iraq War: Some Important Lessons in Historical Context, ,inAshton and Gibson (eds), 577 The Iran– Iraq War,pp. 77– 91: 81.

578 49. CRRC, SH-MISC-D-000– 449, p. 21.

, 579 50. Rangwala, The, Finances ,pp. 97– 9. 51. Jeff Colgar, Petro-Aggression: When Oil Causes War (Cambridge, UK, 2013),

580 p. 121.

581 52. Alnasrawi, The Economy of Iraq,p.109; and Rangwala, The, Finances ,p.99.

582 53. Springborg, In, ﬁ tah ,pp. 51 and 52.

54. Rangwala, The, Finances ,pp. 99– 100.

, 583 55. Alnasrawi, The Economy of Iraq,p.109; and Rangwala, The, Finances ,p.99. , 584 56. Ibrahim Al-Marashi and Sammy Salama, Iraq sArmed Forces: An Analytical

History (New York, 2008), pp. 175– 6.

585

, 57. Farouk-Sluglett and Sluglett, Iraq, since 1986 ,p.23.

586 58. Ibid., p. 23.

, 59. Gately, The, lesson ,251– 7. 587 ,

60. Alnasrawi, Iraq sBurdens,p.31.

588 , 61. Alnasrawi, Iraq:, Economic Consequences ,p.341. 589 62. Marr, The Modern History of Iraq,p.217. , 590 63. Alnasrawi, Iraq sBurdens,p.29. 64. Alnasrawi, The Economy of Iraq,pp. 112– 13. 591 65. CRRC, SH-GMID-D-000– 663, p. 8. 592 593 594 OCS Chapter7— 1/2/2018— NANDHINI.P— 571968— IBTauris

595 596 597 598 599 600 601 602 603 604 605 606 607 608 609 610 611 612 613 614 615 616 617 618 619 620 621 622 623 624 625 626 627 OCS Part_3— 1/2/2018— NANDHINI.P— 571969— IBTauris

1 2 3 4 5 6 PART III 7 8 THEPRODUCERS: NON-OPEC 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 OCS Part_3— 1/2/2018— NANDHINI.P— 571969— IBTauris

34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

1 2 3 4 5 6 8 7 8 9 10 Abandoning Enforced Autarkyfor 11 Re-Insertion in theWorld Petroleum 12 13 Market:Mexican OilPolicy, 1976–86 14 15 16 Juan Carlosa Boué 17 18 The tightening of the world petroleum market in the lead-up to the fi rst 19 oil shock was an unwelcome surprise in Mexico, because it coincided 20 with the Mexican petroleum balance tilting into an outright overall 21 defi cit for the fi rst time since the start of petroleum production in the 22 country.1 Thus, this development increased the pressure on adomestic 23 economy and political system which were already creaking under 24 considerablestrain, as the development model known as Desarrollo 25 Estabilizador began to grind to ahalt.2 This import-substitution led

26 model had produced spectacular resultsthroughout the 1950s and 1960s

, 27 (theso-called Me, xican economicmiracle )but, by the end of the latter 28 decade, it was giving off signs of exhaustion, in the form of worsening 29 public ﬁ nance and commercialbalance indicators as well as heightened 30 social conﬂ ict (which culminatedinthe 1968 student massacre).3 At such 31 ajuncture, the last thing the Mexican government needed was to conjure 32 up new sources of foreign currency to pay for rising volumesof 33 increasingly expensive imported crude oil.4 OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

162 Oil Counter-Shock

34 TheFirst OilShock,then, appearedtoherald theabrupt endofa 35 long period of time during which, foravariety of reasons, Mexico had 36 been largelyisolatedfrom thevagaries of theworld petroleummarket. 37 And, indeed,Mexican autarkyinthe petroleumsphere quickly became 38 athing of thepast after 1973,but notinthe way that would have been 39 expected when the fi rst cargoes of imported oilwere discharged 40 at Tuxpan.Only acoupleofyears after theOrganisation of Arab , 41 Petroleum Exporting Countries (OAPEC)oil embargohad runits 42 course, Mexico hadnot only ceased importing crude oil butits own 43 production hadexpanded so signi fi cantly that thecountry rejoined 44 theranks of themajor oilexporters.Bythe beginning of the1980s, 45 thanks to thediscovery and rapiddevelopment of theoffshore fi elds 46 in theSound of Campeche,Mexicohad become oneofthe top fi ve 47 crudeoil exporters in theworld,aposition that it wastoholdfor 48 more than 20 years thereafter. Indeed,solarge were theincremental 49 export fl ows of Mexicanoil that,togetherwithsimilarly copious fl ows 50 coming fromAlaska and theNorthSea,theymadeadecisive 51 contribution to undermineand eventually bringdown theadministered 52 pricestructure that theOrganization of thePetroleum Exporting 53 Countries (OPEC) endeavouredtoput together once itsmost 54 important members began to selldirectlythe oilwhich theirformer 55 concessionaires used to commercialise. 56 Thecollapse of this administered pricestructure,and the 57 reverberations for all oil exporting countries that it brought in its 58 wake, are commonly referred to as the oilprice counter-shock. When 59 this process reached its apogee with the oil market collapse of 1986, 60 Mexico had only been affi liated to the club of major oil exporters 61 for abrief period of ten years. Nevertheless, the economiceffects of 62 the counter-shock greatly amplifi ed the death throesofthe Desarrollo 63 Estabilizador development model, causing Mexico adegree of damage 64 that has been both greater and longer lasting than anything foreseen in a 65 hypothetical worst case scenario associated with the country becoming a 66 signifi cant net importer of crude oil at the beginning of the 1970s. OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

Mexican Oil Policy 163

67 The story of the resurgence of Mexican oil production, in its 68 volumetricand operational dimensions, has been amply covered , 69 elsewhere.5 The same is true for the Mexican interaction with OPEC s 70 offi cial price and quota systems.6 Ditto of the innovativeresponse of , 71 Petróleos Mexicanos (PEMEX, the country snational oil company) to 72 the breakdown of these systems: the design and adoption of spot market 73 relatedpricing formulae.7 And again, much spacehas been devoted to 74 discussions about the impact of the oil price counter-shock on the 75 Mexican economy and its role as the triggeringevent for both the , 76 country sexternal debt moratorium and the wider Latin Americandebt 77 crisis.8 However, there is one aspectofthe Mexican angle of the oil 78 counter-shock that has not received much attention; namely, the fact that , 79 Mexico semergence from its state of isolation in petroleum matters 80 (during aperiod of transition for the global petroleum industry as a 81 whole) took place within alegal and institutional framework provided by 82 a sui generis governance model incorporating very disparate elements, 83 some of which laid emphasis on the productive dimension of petroleum 84 activities (and were therefore geared towards the goal of output 85 maximisation),while others sought to restrict the free fl ow of capital 86 (speci fi cally foreigncapital) in upstream activities and therefore had 87 great potential as rent maximisation devices (that is, to increase the 88 amount of compensation per unit of output severed from the subsoil). 89 This article will argue that the waxing and waning of Mexican 90 petroleum production over the 1974– 86 period refl ectedthe dialectical 91 tension between the constituent elements of the Mexican petroleum , 92 governancemodel at the time of the country sre-insertion in the world 93 oil market. While production-oriented elements were prioritised at the 94 start of the period (in reaction to the sudden availability of external 95 fi nancial resources for PEMEX and the possibility of employing these 96 funds to thwart the imminent threat of Mexico becoming an oil 97 importer),the rent-oriented elementssubsequently came to the fore – 98 and ultimately prevailed over the others – as the post-1981 oil price 99 decline and the unsustainable growthinMexican external indebtedness OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

164 Oil Counter-Shock

100 (and theproblems arisingtherefrom) convincedthe Mexican , 101 governmentthat PEMEX sinvestments and export volumesboth had 102 to be reined back for there to be any chance of generating enough fi scal 103 revenuestokeep Mexico from asovereign default. In the event, this 104 default proved unavoidable, but Mexican oil policy stayedthe rent- 105 oriented course all the same,aspetroleum levies becamethe central pillar 106 of aMexican public fi nance apparatus unable (or unwilling,politically 107 speaking) to taxthe economicactivities of the non-oil sectors of the 108 economy. 9 109 110 AQuestion of Money? 111 The Mexican petroleum sector governancemodel of the beginning of the 112 1970s appears to display signifi cant affi nities with the one that OPEC 113 membercountries adopted when they nationalised their respective 114 petroleum concessions. Both models, after all, are predicated on 115 excludingprivatecapital from participation in upstream petroleum 116 activities, entrusting these instead to astate oil company. However, this 117 resemblanceisdeceptive. 118 Thedriving force behind thenationalisation of petroleum 119 concessions in all OPEC countries (including the abortive 1951 Iranian 120 one) was, quite simply, the division of the spoils of upstream petroleum 121 activities betweenoil companies and natural resource owners. The tug- 122 of-war between companies and governments culminatedinthe exclusion 123 (or, in places like Abu Dhabi and Nigeria, the drastic curtailment)of 124 private capital from petroleum activities. With the price rises that 125 obtainedinthe wake of the OAPEC oil embargo, full nationalisation 126 of theseconcessions (or, in afew cases, their transformation into fi xed- 127 fee production contracts) becameunavoidable. Simply put, OPEC 128 countriescouldnot countenance, going forward, asituation whereby 129 their future prosperity was to hang on the investment and commercial 130 decisions of ahandful of foreign companies whose stake in the matter 131 would amount to afew percentage points of what the governments 132 OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

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133 themselves stood to make (theratio of governmenttake to company 134 profi ts in Saudi Arabia after the OAPEC embargo was 97.8per cent to 135 2.2 per cent,for example).10 136 The OPEC nationalisation of concessions, then,was aquestion of 137 money. In contrast, the 1938 oil expropriation in Mexico, notwithstand- , 138 ingits ramifi cations for the country ssubsequent economicdevelop- 139 ment, was the answer that the government of Lázaro Cárdenas (1934– 140 40) gave to aquintessentially political question:who wastorule Mexico 141 thenceforth? The exclusionofprivate(and exclusively foreign) capital 142 from petroleum activities in Mexico onlycameabout as aresult of the oil , 143 companies steadfast refusal to abide by the law of the land, leadingtoa , 144 decision on the part of the country spolitical leadership (emanatedfrom 145 anational revolutionary upheaval) that such asituation could not be 146 allowed to continue.11 It is worth recalling that the triggering event of the 147 expropriation crisiswas not money but alabour dispute, albeit one 148 invested with systemic implications because it took place againstthe , 149 backdrop of the companies implacable opposition to the reassertion of 150 the principleoforiginal and inalienable public ownership of the subsoil 151 in the Mexican revolutionary constitution of 1917. 152 At the centre of both the OPEC and the Mexican models of 153 petroleum governance, then, were to be foundnational oil companies. 154 However, under the surface, PEMEX was avery differentbeast from the 155 state oil companies that emerged from the OPEC-wide nationalisation of 156 concessions. The latter were outward-looking entitiesfocused on 157 the international petroleum market, with amandate centred on the 158 generationand maximisation of petroleum rent (in other words, the , 159 objective raison d e^ tre of these companieswas to act as tax collection 160 vehicles). In contrast, PEMEX was an inward-looking entity focused 161 exclusivelyonthe Mexican domestic market, with a fi scal regime to 162 match.12 Crucially, PEMEX had aclear mandate to maximise output, , 163 albeit only to the extent necessary to cover Mexico sinternal petroleum

164 requirements. In the words of Antonio J. Bermúdez (Director General 165 between 1946 and 1958), PEMEX existedinorder to, supply securely the OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

166 Oil Counter-Shock

166 fuels necessary for the progress and development of the country and to

167 ensure that the petroleum industry functioned as akey lever in the 168 independentdevelopment of Mexico, . 13 , 169 PEMEX scapacity to discharge this mandate in full, though, was 170 hamstrung by the paucity of its fi nancial means. This was aggravated by , 171 two factors. The fi rst was the Mexican government sdecision to make , 172 PEMEX responsible for plugging the country sde fi citinlight fuels 173 through imports acquired at world prices but sold domestically at alower , 174 price, with the resulting shortfall being refl ected in the company s , 175 balance sheet.14 The secondwas PEMEX sinability to supplement its 176 internal resources with funds from external sources (due to the harsh 177 terms demanded by commercialbanks, on one hand,and aState 178 Department veto on any US governmentorIMF money being made 179 available to PEMEX to fi nance activities which could be undertaken by 180 private US companies, on the other).15 181 182 PEMEX: One Amongst the New Breed of National 183 Oil Companies?

184

, PEMEX might have subscribed to the mantra of Produce, more! from its 185 inception but its managerswere not in apositiontotranslateconviction 186 , into output because of severe capital constraints. Nevertheless, PEMEX s 187 ethos wasnot far removed from that of the ideal output-centred national 188 oil company (NOC) which topenergy policymakersindeveloped 189 countriesconceived as avehicle which could potentially make adecisive 190 contribution towards curbing the powerofOPEC, by takingover the 191 resource stewardshiprole whichonlypetroleum ministries (the 192 traditional institutional seats for the hydrocarbon property rightsof 193 states) had discharged until then. 194 The idea behind relegating petroleum ministries to the role of 195 rubber-stamping bureaus (subordinated de facto to aNOC) was that the 196 management of petroleum resources should be in the handsofentities 197 more in tune with the requirements of consumers, but nevertheless able 198 OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

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199 to keep their respective sovereign principals at bay. This rationale had 200 been explained as early as 1959 in asecret British government reporton 201 the consortiumofthe major international oil companies set up to operate 202 the Iranian oil industry on behalf of Iran and the National Iranian Oil 203 Company. As the report observed, 204 205 there might [ ... ]beanadvantage in [ ... ]discreetly encouraging 206 the formation of national oil companies [ ... ][because by] its 207 nature and organisation, anational oil company is more likely to 208 gain the necessary knowledge, experience and authority to deal with oil practically and sensibly than apurely governmental 209 administration, which would be more subject to direct political 210 pressures and inhibitions.16 211 212 Morris Adelman spelled out rather morebluntly the expectations of

213

, consumer countries, in terms of just what the practical, and sensible

214 managementofhydrocarbon resources was supposedtomean: natio, nal

215 companies have always been and still are price cutters, . 17 216 The circumstances surrounding the expropriation of the foreignoil 217 companies in Mexico, together with the centrality of the companytothe 218 authoritarian Mexican political system of the day, meant that PEMEX 219 had an appreciable degree of regulatorycontrol over the oil sector. 220 However, despite the strategic policy recommendations of the British 221 memorandum citedabove(andtheir – arguablysuccessful – 222 , implementation in Iran), PEMEX sstatus as de facto regulator availed 223 it for nought in terms of its long-standing aspirationtosecure ﬁ nance 224 from foreign governmental sources. The reason for this was simple: 225 American oil companieswere preparedtocountenance an Iranian-type 226 arrangement with aNOC only in extremis (i.e. where aconcessionary 227 regime had broken down beyond repair and/or suchanNOC provided 228 the onlymeans for American companies to gain entry, conditions both 229 , which had obtainedinIran as well as in Sukarno sIndonesia). But the 230 events of 1970– 3drove the point home that it was no longer advisable, 231 OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

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232 let alone affordable, for consumingcountry governmentstoleave oil to 233 the oilmen.Thus, as alarm bellsstarted going off in earnest – most 234 famously when James Akins (director of fuelsand energy at the State

235 Department until 1973 and subsequently US ambassador to Saudi

, 236 Arabia) solemnly intoned: this, timethe wolf is here 18 – the American 237 governmentresponded by loosening its purse strings and urging banks, 238 development agencies and the like to do likewise, with the aim of funding 239 the search for petroleum in prospective areas outsidethe OPEC 240 cordon.19 PEMEX was amajor benefi ciaryofthe ensuing largesse and 241 this allowed the company to mount an exploration programmethat 242 quickly resulted in aseries of signifi cant discoveries (initially onshore 243 and, later, offshore).20 , 244 PEMEX sexploration successes were greeted with elation in Mexico 245 because they put to rest the looming spectre of petroleum imports. 246 Indeed, such was the magnitude of the fi nds that they prompted aheated 247 nationaldebate – the likesofwhich would be almostinconceivable today 248 (in Mexico or elsewhere) – on whether it would be advisable to develop 249 these newfound resources only to the extent necessary to meet the , 250 country srequirements or, alternatively, whether the countryought to 251 export oil in signifi cant volumes.21 252 This particularquestion was peremptorily settledwhen incoming 253 president José López Portillo designatedJorge Díaz Serrano to be the 254 head of PEMEX andeffectively turned the latter into the czar of the , 255 country spetroleum policy.Upuntil his designation, Díaz Serrano had 256 been amajor PEMEX contractor and so wasautomatically inclined , 257 towards increasing the breadth and scale of the company sactivities.The 258 new Director General sold the President the vision that accelerated 259 expansionacross the whole industrial spectrumofthe petroleum sector 260 would constitute amajor engine of growth in its own right and that, in 261 addition to this, petroleum exports could generate foreign currency fl ows , 262 that would enable the re-activation of the Mexican economy sstuttering 263 engine, chiefl yby fi nancing an ambitiousresource-based industrialis- , 264 ation programme.22 Díaz Serrano sPEMEX,inother words, was the OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

Mexican Oil Policy 169

, 265 incarnationofthe practical, and sensible NOC that consumercountries 266 wanted to see in charge of the development of non-OPEC hydrocarbon , 267 resources (although,inentrepreneurial terms, PEMEX sbreakneck 268 expansion was recklessly imprudentand brought about the collapse of , 269 the company sfragile internal governanceand control structures, and led 270 to acolossal waste of resources, perhaps best epitomised by the 271 catastrophic Ixtoc blowout and ensuing oil spill).23 272 Although rent-centred considerations initially took abackseat in the , 273 defi nition of López Portillo spetroleum policy, the post-1976 patterns of 274 public expenditure and indebtedness soon thrust suchconsiderations to 275 the forefront and put theminto latent confl ict with the unbridled , 276 expansion of PEMEX (not least because of PEMEX sphenomenal cash 277 burn).24 Thus, the Mexican governmentadded arider to the blank 278 cheque that Díaz Serranohad been given until then:the stated target of 279 reaching aproduction levelcomparable to that of pre-revolutionary Iran 280 – around 6mb/d – would not be trimmedback provided that, as the 281 Director General repeatedly asserted, oil priceswould continuetrending 282 upwards (or, at least, would not decline). , 283 Unfortunately for Díaz Serrano sand his political ambitions, the 284 world price of oil peaked in 1980 – when it hit an annual average of $35 285 per barrel – whereupon spot marketpricesbegan to weaken (even 286 though Iranian and Iraqi outputwas greatly affected by these countries 287 being at war). In the face of signifi cant bearish factors, the Mexican 288 governmentnonetheless insisted that acommercially unsustainable 289 positionbeheld coûteque coûte,becausethis waswhat its mounting 290 revenue needs demanded, as amatter of arithmetic. Thus, by the end of 291 1980, despite the fact that Mexican Isthmus crude and Saudi Arabian 292 Light were of avery similar quality, the former was being sold at a$2.50 293 per barrel premium to the latter and this already unjustifi able premium 294 would balloon to $6 per barrel during the fi rst half of 1981. Indeed, in 295 January 1981,eventhe offi cial selling price (OSP) of heavy sour Maya 296 crude oil ($34.50 per barrel) was higher than that of Saudi Arabian Light 297 ($32per barrel).25 OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

170 Oil Counter-Shock

298 In June 1981,under tremendous customer pressure, Díaz Serrano 299 took the fateful decision to reduce Mexican OSPs by $4 per barrel. 300 Asmalleradjustment might havesuffi ced to restore the competitiveness , 301 of Mexican crudes, but Díaz Serrano sadvisorsinsisted that only an , 302 adjustment of this magnitude would satisfy some of PEMEX sirate US 303 customers. However, the implementation of theseprice cuts from a 304 political point of view was suicidal: the Mexican cabinet only learned 305 about them upon reading apress cutting from the New York Times which 306 was sent via courier to the presidential residence by the staff of the 307 secretaryfor National Patrimony.26 An irate President LópezPortillo 308 demanded that Díaz Serrano (clear frontrunner at that point for the 309 presidential elections of 1982) fall on his sword and the price cuts were , 310 rescinded by the Cabinet. Obviously, PEMEX scommercial position , 311 continued to deteriorate after Díaz Serrano ssacking, because Mexican 312 crudes were simply too expensive in relative terms. The day of reckoning 313 came in July 1981, when exports of crude collapsed to 500,000b/d 314 (compared to a fi gure of 1,350 mb/d for April of that same year). This 315 traumatic reduction in export volumes meant that, ultimately,Mexico 316 had to adopt price cuts as large as those originallyadvocated by Díaz , 317 Serrano.27 Crucially, this decision was not taken on PEMEX ssole , 318 authority, as had been the case in Díaz Serrano sdays. Instead, it was a 319 collegiate decision of the Cabinet, taken after it had been reviewed and 320 sanctioned by the entity that effectively took over the regulationof , 321 Mexico shydrocarbons sector:the Ministry of Finance ( Hacienda). 322 323 ASwift Transition to aRent-Centred Regime 324 , The end of PEMEX sdaysasthe de facto regulatory agency for the 325 Mexican upstream sector meant that, from that point on, PEMEX would 326 have to submit to the consideration of the Ministry of Financeany 327 decision having aforeseeable material impact on public fi nances 328 (whether commercialdecisions to adjust prices, or investment decisions 329 requiring signifi cant outlays). And, as arule, PEMEX wasto fi nd that 330 OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

Mexican Oil Policy 171

331 clearance for such decisions would only be forthcoming to the extent 332 they satisfi ed narrow, fi nancial criteria, sinceshort-term fi scal , 333 considerations were almostinvariably at the top of Hacienda slist of 334 concerns. 335 The effect of this change of priorities for the Mexican petroleum , 336 sector is discernible in PEMEX sproduction profi le: as Figure 8.1 shows, 337 the growth trend in Mexican oil production wasabruptly interruptedin 338 1982and would not pick up again until 1996– 7(aside from asmall 339 increase prompted by the Iraqi invasion of Kuwait and its sequels). 340 Post-1976Mexicanpetroleum policy hadprivilegedoutput and 341 activity targets over anyother consideration,including fi scal ones. 342 Government taxrevenues skyrocketed as aresult of theMexican 343 petroleum boom, butthiswas asecondary consequence of thepursuit , 344 of PEMEX sproduction goals at atime of rising oilprices. As Figure 8.2 , 345 shows, during theDíaz Serrano years, thebulkofthe government s 346 fi scal income came fromanexport tax(initially enactedin1974and 347 amounting on average to around 58 percent of exportrevenues in its 348 last years). To complement this exporttax there wasamodest 349 350 351 352 353 354 355 356 357 358 359 360 361

362 Figure8.1 Mexico: total production of hydrocarbons and price of 363 Mexican crude oil export basket, 1972– 99. OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

172 Oil Counter-Shock

364 365 366 367 368 369 370 371 372 373 374 375 Figure 8.2 Mexico: fi scal income and gross petroleum industry 376 income, 1972– 99. 377 378 severancetax ( derechodeexplotación ), with an effectiverateequivalent 379 to fi ve percent of thegross valueofproduction.Ascan be appreciated, , 380 this fi scal regime tied theexpansion of thegovernment s fi scal revenues , 381 to thegrowth in PEMEX sexport volumes(and, therefore, to 382 production increasesinexcess of underlyingdomestic demand). Such 383 an arrangementmight have madesense for thegovernment in the 384 context of an expansionist production policy,but notinacontext 385 whereexports weretobelimited pursuanttothe investment 386 retrenchment that Hacienda forced on thecompany.Hence, the 387 export taxwas scuppered in 1982 (afterthe Mexicandebtcrisis),tobe 388 replacedwithacomplex severance taxstructure which collected 389 upwardsof50per cent of grossupstreamrevenues(andthe equivalent 390 of all theexport income).28 Hacienda devoted mostofthe money thus , 391 collected to service Mexico sexternal debt. 392 With the adoption of these changes, the post-1982 Mexican 393 petroleum fi scal regime becamecomparable, in terms of its overall (rent- 394 centred) thrust, to the fi scal regimes of those OPECcountries which had 395 nationalised their petroleum concessions in the 1970s.This radical 396 transformation of the Mexican fi scal regime was accomplished in a OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

Mexican Oil Policy 173

397 matter of months (under the shadow of adebt default).InOPEC 398 countries, in contrast,this subordination of the rationality of oil capital 399 to the interests of the sovereign resource owners qua landlords in receipt 400 of rents (whichtheir respective fi scal regimescrystallisedand their 401 decision to nationalise took to its ultimate expression) was the outcome 402 of along tug of war which spanned decades.29 Thus,whereas in OPEC 403 countries, the objective of maximising petroleum rent eventually led to 404 the exclusion of private capital from the upstream, in Mexico it was the 405 prior exclusionofprivate capital that made rent maximisation possible. 406 The question of how Mexico managed to end up in the same place as 407 the key OPEC countries, despite having set off from avery different 408 position, can be answeredbylooking into the internal political drivers , 409 behindMexico sprogressive withdrawal from the world petroleum , 410 market after 1938. To aconsiderableextent, Mexico sstate of petroleum 411 semi-autarkywas dictatedbyfactorsoutsidethe control of the Mexican 412 government: the efforts on the part of the expropriated companies to , 413 boycott Mexican oil exports (and the machinations of the companies 414 supporters in the United Statesand the UnitedKingdom), the post-1951 415 decline in outputatthe PozaRica giant fi eld (discovered in 1932) and, 416 lastbut not least, the steadyand signifi cant growth in Mexican demand , 417 for petroleum products. However,Mexico sincreasing isolation from the 418 world oil industry and marketwas also an intended outcome of decisions 419 taken by asuccession of Mexican governments,over the 1940– 60 420 timeframe. 421 In 1938, the Mexican government would have preferrednot being 422 barred from the oil export marketaltogether (whether by geology or 423 politics). However, the administrations of the presidents who succeeded 424 Cárdenas – Avil aCamacho(1940– 6),Alemán(1946– 52),Ruiz 425 Cortines (1952– 8) and López Mateos (1958– 64) – gradually reached 426 the conclusion (with the didactic aid of episodes such as the stillborn , 427 Iranian nationalisation)that Mexico sability to hold the petroleum 428 governanceline that Cárdenas had laid down was made easier by the fact , 429 that the country spetroleum sector did not generate sizable rents from OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

174 Oil Counter-Shock

430 oil exports.30 Indeed, it was well understood that the signifi cant domestic 431 dimension to the Mexican oil industry had been essential in laying the 432 foundations for aviablenational petroleum administration,not least 433 because it made Cárdenas less vulnerable to the sort of oil-related , 434 retaliatory measureswhich proved to be Mossadeq sundoing and 435 brought about the effective reversal of nationalisation in Iran. 31 For the 436 Mexican government,the effects of other politically motivated measures 437 prompted by the expropriated companies, notably interruptions in US 438 governmentpurchasesofMexican silver,caused much greater fi nancial 439 problems than the oil boycott,but ultimately proved beyond the 440 capabilities of the oil companies to sustain due to the imminence of a 441 new world war. 32 442 Presidents Avila Camacho, Alemán, Ruiz Cortines and López 443 Mateos all shared agreat enthusiasm for foreigndirect investment. 444 Nevertheless, they all came to believe that the involvement of foreign , 445 capital in Mexico soil sector was not agood idea, because the major oil 446 companies (with the backing of the American government)were not 447 prepared to participateinthe Mexican upstream on terms that Mexico 448 might fi nd acceptable and simply leave matters at that.33 This wasdriven , 449 home by PEMEX sexperiencewith risk exploration contracts, which the 450 post 1938 legal framework allowed. Ahandful such contracts were 451 awarded during the administration of Miguel Alemán and produced 452 paltry results. More importantly, they provided the US government and 453 the oil companieswith an instrument that lent itself to be used as awedge 454 to pry open, once again, the access pathsfor private capital into the 455 Mexican upstream sector. The political pressures that thesecontracts 456 generated confi rmed that, whatever terms Mexico might be prepared to 457 offer, the major oil companies would never cease to agitate for better 458 ones and, in so doing, would not hesitate to mobilise forcesthat would 459 greatly complicate the task of governing the country.34 460 This is the explanation behind one of the morepuzzling (and 461 misunderstood) aspects about the evolution of Mexican petroleum 462 governancestructures; namely, that it was not the left-wing Cárdenas OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

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463 whodecided to close the Mexican upstream altogether, but rather his 464 conservative successors.Despite their ideological proclivities, presidents 465 Avila Camacho, Alemán, Ruiz Cortines andLópez Mateos would all 466 cometosee that the less Mexico had to do with the international , 467 petroleum scene, the moremanageable the country sinternal politics. 468 Because of this, after 1940,the variousconstitutional and statutory 469 elements restricting the participation of private capital in the Mexican 470 petroleum sector went through aseries of iterations which saw loose 471 screws tightened, loopholesclosed,chinks in the armour sealed off(for 472 example, the signing of new risk exploration contracts was barred after 473 1958). This depuration process reachedits apex in 1960,when the 474 constitutional language governing the participation by privatecapital in 475 the Mexican upstream crystallisedintoaradically restrictive formula that 476 would remain unchanged until 2013. 35 477 478 Conclusion 479 Ultimately, it was this constitutional formula which,inthe early 1980s, 480 enabledMexico to adopt apetroleum fi scal regime (and anon-expansive 481 production policy)that was as absolutely rent-centred as that of any 482 OPEC country and all without the barrage of political fl ak that OPEC 483 attracted. Of course, Mexico only adopted this fi scal regime in response 484 , to the calamitous fi nal collapse of the country seconomicdevelopment 485 model, acollapse in which oil played no small part. 486 The1960reformtoArticle 27 of theMexicanConstitution expressed, 487 in statutoryform, acentraltenetofthe DesarrolloEstabilizador model, 488 whichCarlosFuentes describedinhis novelabout thegreat Mexicanoil 489 discoveries of the1970s: anationallyoriented projectofaconservative 490 politicaltenor, predicated on stayingout of theGreat Game de nos jours ,a 491 game in whichthe countryonlystood to losewere it to become embroiled 492 in it. 36 Transforming Mexico into an oilexportingpowerhouserequired 493 jettisoningthistenet.López Portilloand Díaz Serranotookthisgamble 494 thinking that they – to useaMexicanidiom – couldchewglass andspit 495 OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

176 Oil Counter-Shock

, 496 outmarbles,but bothprovedmaladroit sorcerer sapprentices andthe 497 forces theyunleashed endedupbyswampingthe country. Mexico is yetto 498 recoverfromthe long-term effectsoftheir disastrous economicpolicy 499 decisionsand recentdevelopmentsinthe country – notablythe casualty 500 ﬁ gures andviciousnessofalowintensitycivil warthatrages underthe 501 guiseofananti-drugpolicyand thedecisionbythe Peña Nietogovernment 502 to imitatefaithfully theVenezuelanpetroleumliberalisation modeldespite 503 thehavoc that it wreakedinthatcountry – suggest that,evenafter more 504 than 30 yearshaveelapsed, thebottommight stillbeawayoff. , 505 Mexico soil boom andsubsequent sudden bust also made a 506 contributiontoradicaliseinternational petroleumpoliticsasawhole. 507 Theinterruptioninthe growth trend in Mexicanoil production was 508 brought aboutbyanationally grounded institution ( Hacienda)which,even 509 if only to staveoff the creditors, didnot subscribe to aglobalisedvision 510 of production àoutrance ,and waswilling andableofextracting the 511 maximumbeneﬁ tfromnationalproperty rights over ascarceand valuable 512 naturalresource.Thisdevelopment wasgreetedwithdismaybyconsuming

513 countries, whohad countedonMexico scontribution to, bringabout a 514 reductioninoil prices by breaking thepower of OPEC, (toparaphrase 515 Henry Kissinger). 37 Thesuddenchangeinthe orientation of Mexican 516 petroleumpolicywas thereforetaken as proofpositivethatthe pursuitof , 517 thewider agendaofincreasingthe output of oiloutside of OPEC scontrol 518 wouldhavetoinvolve thedemolitionofgovernance institutionsfocused on 519 thecapture of petroleumrent in majoroil exporting countries. This 520 particularlessonhas been indeed applied, with extremeprejudice(and 521 lamentablepolitical consequences), in asuccessionofOPECand non- 522 OPEC countriesthroughoutthe 1990s and, ironically,isnow in theprocess , 523 of beingapplied in Mexico itself. Ilsnont rien appris,nirien oublié. 524 525 Notes 526 1. PEMEX did not export any crude oil at all, for the ﬁ rst time in its history, in 527 1966. Mexico became anet petroleum importer (by volume) in 1971. 528 2. Roger D. Hansen, The Politics of Mexican Development (Baltimore, 1974). OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

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, 529 3. Soledad Loaeza, Gustavo, Díaz Ordaz: el colapso del milagro mexicano ,in I. Bizberg and L. Meyer (eds), Una historia contemporánea de México 530 (México, 2003), vol. II, pp. 117– 55. , 531 4. By 1973, Mexico sdisbursements for imported petroleum (crude and 532 products) were running at 3.5 billion pesos ($300 million) per year: Lorenzo Meyer and Isidro Morales, Petróleo ynación (1900– 1987). La política 533 petrolera en México (México, 1990), p.159. 534 5. For ade ﬁ nitive account see Adrián Lajous, La industria petrolera mexicana: 535 estrategias, gobierno yreformas (México, 2014). 6. See Paul Horsnell and Robert Mabro, Oil Markets &Prices: The Brent 536 Market and the Formation of World Oil Prices (Oxford, 1993). 537 7. Juan Carlos Boué with Liliana Figueroa, The Market for Heavy Sour Crude 538 Oil in the US Gulf Coast: The PEMEX/PDVSA Duopoly (Oxford, 2002). 8. From 1973 to 1981, the external debt of the public sector in Mexico had

539 grown at an average annual rate of more than 30 per cent, from $4 billion to

540 $43 billion. See also chapter 7(The, Mexican Crisis: No Mountain Too High?, )ofJames M. Boughton, Silent Revolution: The International 541 Monetary Fund 1979– 1989 (Washington, DC, 2001).

542 9. At around 15 per cent, the Mexican tax/GDP ratio is the lowest in the whole

543 of the OECD. See Juan Carlos Boué, Aspectos, ﬁ scales de la apertura petrolera en México, ,inI.Rousseau (ed.), ¿Hacia la integración de los 544 mercados petroleros en América? (México, 2006), p. 421. 545 10. Bernard Mommer, La cuestión petrolera (Caracas, 1988), p. 212. 546 11. J. Richard Powell, The Mexican Petroleum Industry, 1938– 1950 (Berkeley, 1956), p. 32. 547 12. In 1970, the only levy applicable to upstream petroleum activities in Mexico 548 was amodest severance tax. The Mexican government received considerably 549 more ﬁ scal revenues from excise taxes on motor fuels. 13. Antonio J. Bermúdez, La política petrolera mexicana (México, 1988), p. 18. 550 14. In 1958, for instance, PEMEX paid 626 million pesos ($50.1 million) in taxes 551 but its losses on products imports were 687 million pesos ($55 million); see Antonio J. Bermúdez, The Mexican National Petroleum Industry (Stanford, 552 1963), p. 258. 553 15. Isidro Morales, Cecilia Lezama Escalante and Rosío Vargas, La formación de

554 la política petrolera en México, 1970– 1986 (México, 1988). 16. H.M. Government, Middle, East Oil. Report by aWorking Party of Ofﬁ cials

555 [POWE33/2529], ,inA.L.P. Burdett (ed.), OPEC Origins and Strategy, 1947– 556 1973,Vol. 1, 1947– 1959. Developments and Events Leading to the Creation of

557 OPEC in 1960 (Cambridge, UK, 2004), p. 304, italics added. 17. Morris Adelman, Is, the Oil Shortage Real? Oil Companies as OPEC

558

Tax-Collectors, , Foreign Policy 9(Winter 1972– 3), pp. 69– 107: 87.

559 18. James Akins, This, Time the Wolf Is Here , Foreign Affairs li/3 (1973),

, 560 pp. 462– 90. James Akins, This, Time the Wolf Is Here , Foreign Affairs li/3 (1973), pp. 462– 90. 561 OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

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, 562 19. David Ronfeldt, Richard Nehring and Arturo Gándara, Mexico sPetroleum andUSPolicy: Implicationsfor the1980s.R-2510-DOE (Santa Monica, 563 1980). 564 20. During the 1970s, only three supergiant ﬁ elds were discovered in the world 565 and all three were located in Mexico. 21. See Bermúdez, La política petrolera mexicana.

566

22. Richard M. Auty, Resource-based, Industry in Boom, Downswing and 567 Liberalization: Mexico, , Energy Policy xix/1 (1991), pp. 13– 23. Even so, the

568 government felt impelled to mollify the opponents of petroleum exports by saying that Mexico would export, oil and gas only as atemporary

569 [ coyuntural ]measure in order to orient ourselves to anew program for 570 medium-and long-term industrialization, (Ronfeldt, Nehring and Gándara, , 571 Mexico sPetroleum and US Policy,p.57). 23. The 1979 Ixtoc-1 well blowout gave rise to the third worst oil spill in history 572 (by volume), only tailing those caused by the Iraqi sabotage of Kuwaiti oil 573 facilities in 1991 and the one caused in 2010 by the Macondo blowout in the US Gulf. The Ixtoc-1 blowout caused environmental damages conservatively 574 estimated at $600 million in money of the day.

575 24. In 1978, for example, PEMEX investment on its own amounted to 5per cent

, 576 of GDP (Auty, Resource-based, Industry ,p.18). 25. Boué and Figueroa, The Market,p.74. 577 26. Ibid., on the basis of apersonal interview with Adrián Lajous (PEMEX 578 Director General, 1994– 9). , 579 27. The damage that this episode did to PEMEX scommercial reputation was mitigated by the fact that, post-1982, the US Strategic Petroleum Reserve 580 (SPR) became the single most important lifter of Mexican crude oil. The SPR 581 purchases formed part of the debt rescue package for Mexico. 582 28. The complexity stems from the division of the severance taxes into three tiers – ordinary severance tax levied at arate of 52.3 per cent of net income, 583 extraordinary severance tax levied at arate of 25.5 per cent of any remaining 584 net income after the application of the ordinary severance tax and additional severance tax levied at arate of 1.1 per cent of any net income remaining 585 after the application of the previous two taxes – for reasons having to do

586 with the distribution of funds to Mexican federal states. See Juan Carlos

, 587 Boué, La, captura de la renta petrolera: el régimen ﬁ scal petrolero mexicano , Revista del Banco Central de Venezuela 3(1999), pp. 225– 44. 588 29. See Bernard Mommer, Global Oil and the Nation State (Oxford, 2002). 589 30. Adetailed and revealing account can be found in Miguel Alemán, La verdad sobre el petróleo en México (México, 1977). 590 , 31. In 1938,domesticconsumption wasabsorbing around 65 percentofMexico s 591 crudeoil output.The generalisedperceptionabout theexpropriation of theoil 592 companiesinMexicohas always been that this wasanevent involvingamajor

593 oilproducing country, whichMexiconolongerwas.See forexample Stephen

, Kobrin, Th, eNationalisation of OilProduction1918 – 80 ,inD.W.Pearce, 594 OCS Chapter8— 1/2/2018— NANDHINI.P— 571970— IBTauris

Mexican Oil Policy 179

595 H. Sieber andI.Walter(eds), Risk andthe PoliticalEconomy of Resource Development (London, 1984), pp.137– 64. 596 32. In 1936, the Mexican government earned 24 per cent ($30.5 million) of its 597 total revenues from silver sales, twice what it earned from oil taxes (including 598 excise taxes); Noel Maurer, The Empire Struck Back: The Mexican Oil Expropriation of 1938 Reconsidered: HBS Working Paper 10– 108 (Boston, 599 2010), p. 13. 600 33. Alemán, La verdad sobre el petróleo en México. 34. Ibid. 601 , 35. Before its reform in 2013, Article 27 of Mexico sConstitution provided that,

602 in regard to hydrocarbons resources, no, concessions or contracts shall be

603 granted [ ...]and the Nation shall carry out the exploitation of those

604 substances, under the terms set forth in the respective Regulatory Law, .

36. Call, me aconservative nationalist, if you will. Iwould like to preserve that, a

, 605 project of ours and avoid foreign blocs, playing with us :Carlos Fuentes, 606 La cabeza de la hidra (México, 1978), p. 111. 37. Henry Kissinger, Years of Renewal (New York, 1999), pp. 668– 9. 607 608 609 610 611 612 613 614 615 616 617 618 619 620 621 622 623 624 625 626 627 OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

1 2 3 4 5 6 9 7 8 9 10 TheDoubleShock: TheSoviet Energy 11 Crisisand theOil PriceCollapse of 1986 12 13 14 Olga Skorokhodova 15

16 , 17 Since Stalin sGreat Leap Forward,the Soviet political and social 18 discourseofeconomic developmentwas dominatedbywhatis 19 appropriate to term as heroic language. In the late1960s and early 20 1970s this language was employed to portray the feat of the Soviet 21 oilmen, who moved the centre of the Soviet oil industry to the West 22 Siberian wilderness. This achievement not only made it possible to meet 23 rising ﬁ gures of the oil production plan, but also established the USSR 24 among leading oil producers. Against this backdrop,the Soviet energy 25 crisis – aslowdown of the growth in output in the 1970sfollowed by the 26 fall of production in 1984 and 1985 – was especially strikingand, to 27 some extent, perplexing; the inability of the Soviet oil industry to sustain 28 the level of production manifesteditself at atime when the global energy 29 market washit by overproduction. 30 Interconnections betweenenergy andpolitics in Russian– European 31 relations have grown signiﬁ cantly over the last decade, and so has the 32 amount of publicationsonthe subject.Inthe aftermath of the Russian– 33 Ukrainian gas wars, much has been written on the political use of OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

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34 hydrocarbon resources by modern Russia.1 In contrast, the energy export 35 policy of the USSRhas been largely missing – or missed – in historical 36 research on energy, but that can be partly explained by the restricted 37 access to Russian archives. Indeed, earlier accounts by Margaret 38 Chadwick, Thane Gustafson, Maria Slavkina and others2 were mainly 39 focused on the Soviet energy industry itself. It was not until recently 40 when the pioneering archivebased researchofPer Högselius (2013) has 41 given us aclearer understanding of the Sovietgas trade with Europe, as 42 well as efforts by Jeronim Perovica nd Dunja Krempin,3 whose article 43 explored interlinks between energy considerations and Sovietforeign 44 and economicpolicies in the 1970s. Following the same line and drawing 45 from Russian archives, this paper aims to shed light on the Soviet 46 perception of the dramaticdevelopments that unfolded in the energy 47 market in the early 1980s,inthe broadercontextofsoaringoil pricesand 48 the crisisinthe Soviet energy industry. 49 50 The Soviet Energy Triumph, Technology Transfer 51 and the Tragedy of DeTente 52 The 1970s were truly adecade of internationalisation for the Soviet 53 economy. Foreigntrade grew ﬁ ve timesfaster than the national economy 54 and had gaineda10 per cent equivalent of the national income by the 55 late1970s. Oiland, in later stages, gas, wasatthe very centre of this 56 unprecedented growth.Itwas exactly in this decade that the foundation 57 for the Soviet/Russian statusofanenergy superpower was laid down. 58 According to ofﬁ cial statistics, oil export to the dollar zone grewfrom 44 59 million tonnes in 1970 to 170 million tonnes in 1986.4 By 1983,energy 60 and fuel goods composed 53.7 per cent of Soviet exports. In the same 61

year, total exports amountedto36.4 billion rubles with oil revenue

, covering more, than threefourths of it.5 63 It is of primary importance to take into consideration the seemingly 64 purely political factor that underlinedadeepening Soviet involvement in 65 the world of oil and gas trade. 6 Détente boostedeconomiccooperation 66 OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

182 Oil Counter-Shock

67 between the socialistand capitalist camps in general and resulted in a

, 68 number of deals, of the century that brought Soviet oil and gas to 69 Europe, as well as US and European gas and oil technologies to the USSR. 70 While petrodollars ensured the social and political wellbeing of the 71 country, the latter acquired strategic importance for the fate of the Soviet 72 oil industry. 73 At the end of the 1960s, at the dawn of détente, the Sovietleadership 74 made acrucial decision to start moving the centre of oil production to

75 West Siberia with the idea of using the beneﬁ ts of Western and Japanese 76 equipment to achievethis goal. The concept of the, intensiveuse of

77 advanced international experience through purchasesofproduction lines 78 and completeenterprises for licensed production, 7 had been promoted 79 by Nikolai Baibakov, aformer oilman and the head of the State Planning 80 Committee ( Gosplan)atthat time,and supportedbythe Soviet prime 81 minister Alexei Kosygin. 82 In otherwords,West – East oilcooperation in termsofincreased Soviet 83 supplies to Europe andWestern machineryexportstothe USSR turned 84 outtobeone of the ﬁ rstfruitsofdétente.Therefore,itwas boundtogo 85 througharise andfall, as didthe politics of détente. Whilethe Nixon – 86 Ford administrationsactivelynegotiatedseveral oiland gasprojectswith 87 theSoviets,President JimmyCartertookaratherdifferent stance on the 88 matter.In1977 and1978the US intelligence communitypreparedseveral 89 widely discussedreports on theupcomingSovietenergycrisis.8 Eventually,

90 some of them were made public at therequest of CapitolHill.9 Although

91 themainpredictionthatthe Soviet oilproductionwould peak no, tlater

, , 92 than in theearly 1980s andthat th, edecline,whenitcomes,willbesharp 93 didnot provetobeentirelytrue(thedecline wasnot that sharpand 94 production having fallen fortwo yearsreturned, albeit forashort time,to

95 themaximum levelin1988), arecommendationmadeinone of those 96 reports to, usetechnologytransfers,speciﬁ callyinoil production,tobring

97 pressure to bear on theUSSReithertoalter itsbehaviour or suffer the 98 resultingconstraints on itseconomicassetsand military capabilities, , 10 99 hadavery far-reaching effect. OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

The Double Shock 183

100 After more than ayear of interagency discussions, on 18 July 197811 101 President Carterincluded oil production equipment in the export- 102 licensing list. Later on, in January 1980, as areaction to the Soviet 103 invasion of Afghanistan, the President suspended issuance of export 104 licences, thus effectively limiting the ﬂ ow of US equipment to the 105 USSR.12 This trend culminated in 1982 and 1983when PresidentRonald 106 Reagan, in abid to blockorpostpone the construction of the Soviet 107 exportpipelinetoEurope, imposed sanctionsagainst European 108 companies and American subsidiaries involved in the project – a 109 move that wasstrongly rebuked by Europeangovernments.13 Even

110 though Washington had to revoke this decision at the end of 1983,some

, 111 of the oil and gas related items of cru, cial strategic importance were 112 included in the COCOM list. 14 The White House also tried to reinforce 113 the tactics informally, for instance, by persuading Japan not to sell its

114 robotics to the USSRorstrongly discouraging American companies from

115 signing any new contracts with Moscow, in, spite of the existinglegal 116 possibility to issue export licenses for certain types of equipment, . 15 117 Thus, in the late 1970sand early 1980s, an important link between 118 energy security concerns, the politicisation of the Soviet oil trade and the 119 return to Cold War confrontation emerged as essential factors which had 120 amajor inﬂ uence on the Soviet oil industry in the 1980s.

121

, 122 Impending, Oil Crisis :Soviet Evidence 123 The CIA was often criticised for its inaccurate assessment of the Soviet 124 political, economicand military strength; 16 however, once it cametothe 125 oil and gas industry, the US intelligence community wasonthe right 126 track. Although concrete fi gures turned out to be incorrect,itis 127 important that upcoming problems in the Soviet industry were red- 128 fl agged by intelligence analysts at an early stage and that, if not 129 confi rmed, they were not deniedbySoviet offi cials.17 130 The Sovietreaction to the publication of the CIA reportswas 131 accompaniedbyremarkable reticence. Already the Tenth Five-Year Plan 132 OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

184 Oil Counter-Shock

133 (1976– 80) envisaged slower growth of oil production, however, it came 134 as abig surprise that Soviet offi cials, while criticisinginavery moderate 135 and rather formal way what was published,started discussing existing 136 and upcoming diffi cultiesinthe energy sector, including in public 137 speeches. In March1977, in the same month the fi rst CIA report was 138 released, Alexei Kosyginassured the Finnish President that the USSR

139 would guarantee stable oil supply for the next 15 years, noting however

140 that the, fuel problem cannot be solvedeasily; in 1977– 80 production

141 will be lower than it was plannedbefore, . 18 142 The White House attributed suchareaction to as, tate of concern and

143 uncertainty amongresponsible Soviet offi cials over the energy prospects 144 of their country, . 19 Indeed, aquick look into the Soviet oil and gas 145 journals is enough to conclude: the crisiswas already thereinthe mid- 146 1970s, and Soviet offi cials were well awareofit. From 1975 onwards, the 147 problem of ineffi ciency in exploration, production, and transportation 148 gained prominence in Soviet specialised literature.20 According to one of 149 the experts, in 1971 – 5, the coeffi cient of investment effi ciency in the oil 150 industry fell dramatically, from 0.24to0.17.21 The next example is even 151 more revealing: in 1971– 5, in order to meet the planned fi gure of 152 production growth of 134 million tonnes, 392 million tonnes of new 153 capacities had been required, meaning that morethan 250 million tonnes 154 of oil were needed just to compensate for the accelerated falling 155 production of the old fi elds.22 156 TheTenth Five-YearPlan(1976– 80)was ful fi lled thanks to massive 157 budget allocationsthatgrewby65.4per cent in comparison with the 158 previous fi ve years, from atotal of 16.0 billionrublesto26.4billion rubles, 159 andthisisfor theoil industry alone. Overall, theenergy sectorreached 160 14 percentofthe totalbudgetfor industrial development, compared with

161 7per cent in theprevious ﬁ ve-yearplan.23 It wasexactly what Gustafson,

162 oneofthe most prominentresearchers of Soviet energy,called th, e 163 growingburdenofenergy, ,referring to theextremely high pricethe USSR 164 hadtopay in ordertosatisfy domestic demand,fulﬁ lits export obligations 165 andprovide thecountry with much-needed hard currency. OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

The Double Shock 185

166 It should be noted that even the oil pricecollapse of the mid-1980s 167 could not reverse this trend. In September 1985 at the meeting with the 168 Tyumen workers (a major Soviet production region) the newly elected

169 general secretary Mikhail Gorbachev announced a60per cent oil budget

170 increase with the aim to raise, efﬁ ciency and reliability of the main fuel

171 baseofthe country , . 24

, 172 In theearly1980s theso-called ,turn to gas became oneofthe ways 173 to alleviatethe growingburdenofoil.In1980 thestrategyofrapid 174 developmentofthe gasindustry wasadopted (generalsecretary Leonid 175 Brezhnevwas itssupporter, amongothers) andthe budget of theoil 176 andgas industry wasincreased by 50 percent.25 Theprimarygoalof 177 thenew policies was not to increase gasexportper se, buttosubstitute 178 galloping domesticoil consumption anddivert moreoil forexport. 179 Despitethese measures, alreadyin1982Tyumenfailedtomeetplanned 180 fi gures.26 In 1984– 5for the fi rst timeinpostwarhistory theUSSR 181 experiencedadecrease in oilproduction by 0.5 percent and3percent, 182 respectively. 183 At the same time it was 1984when Sovietoil export to the West 184 reached its peak at 170 million tonnes. But already in 1985 Moscow had 185 to cut its supplies to OECD countries by an astonishing 6per cent.27 One 186 can say that this might be explained by lower global demand that was the 187 underlying factor of the energy counter-shock of 1985– 6. However, it 188 wasnot the case. Archival documents demonstrate that the USSRdid not 189 deliver the contractedamount of oil to Japan28 and Finland. The latter 190 wasthe only non-socialist country heavily dependent(up to 70 per cent) 191 on Soviet oil.29 The same happenedwith the gas contracted by Germany: 192 in February 1985 the deputy foreigntrade minister Nikolai Osipov was 193 urgently informed that the pressure in the export pipeline to Germany 194 had dropped to 35 bar as only98.4million m 3 of gas had been pumped 195 into the systeminstead of 146.4 million m 3 .Ataround 33 bar, according 196 to the report, compressor stationswould be shut down automatically.30 197 Later that year,inmeetingswith their foreigncounterparts, Soviet 198 offi cials tried to explain away these failures with temporary technical OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

186 Oil Counter-Shock

199 problems and weather conditions. However,until the end of the year the 200 Soviet Uniondid not manage to offsetthis undersupply. 201 202 Crisis in Demand and Energy Investments 203 Like other oil producers, the Soviet Union sufferedfrom the reduction in 204 demand as in the early 1980s the oil marketgradually moved to a 205 consumermarket. For the USSR the situation was aggravated by the fact 206 that in the late 1970s and the early 1980s, large-scaleinfrastructure 207 projects,such as the Urengoy– Pomary– Uzhgorod pipeline, or Siberian 208 pipeline,31 were implemented in anticipation of an export increase. 209 In 1979, when negotiations concerning the Siberianpipe were at an early 210

stage, the USSR received applications for 60– 70 billion m 3 of gas from

211

, six countries that, signiﬁ cantly exceeded plannedcapacity of the 212 project.32 213 However, the situation changedrapidly. For example, in 1981 Italian 214 ofﬁ cials pressured the Soviets to allocate at least 10 billion m 3 ,while three 215 years later Italy lowered its contractedamount of Sovietgas to less than 216 6billion m 3 . 33 The same happened with oil supplies: in 1983 head of the 217 Italian oil giant ENItried to convince the deputy ministerNikolai Osipov 218

that his company had to cut Soviet imports by 25 per cent due to

219

, problems with reﬁ neries and not for political, purposes . 34 220 Likewise, in November1985 the delegation headed by the deputy 221 minister Vladimir Sushkov travelledinvain as far as Japan. Sushkov, 222 the most inﬂ uential Sovietoil negotiator, was tasked to push forwardthe 223 oil and gas production project in Sakhalin that had been in negotiation

224 since the early 1970s, but the Japanese express, ed the need to postpone

225 realization of the projectbythree years, .Waving offSoviet ambitions and 226 hopes, they promised to comeback to the Sovietproposal in the second

227 half of the 1990sonthe groundsthat the, Japanese companieshad

228 already secured long-term oil supply contracts, . 35 Archivesrevealthat 229 the outcome of the Japanese trip caught Moscow by surprise. The 230 Kremlin had been contemplating the offer at least since 1983, hoping that 231 OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

The Double Shock 187

232 the traditional strategyoffavourable pricing would work out and being 233 apparently unable to embrace the idea that the scale of the Sakhalin 234 project andthe exorbitantcosts were irrational at the time of the oil glut. 235 236 The Soviet Energy Crisis: What was to Blame? 237 ThaneGustafson framed the situation in the Soviet oil sector in the late 238

1970s and early 1980s as afundamental reform issue of the Soviet system.

239

, Still, for him it remained an interes, ting question how the list of the

240 problems experienced by the industry must, have lookedtothe new

241 Soviet leadership takingshape in 1983– 5 , .Below is some archival 242 evidence on the matter. 243 In early 1983, there was agreat deal of discussionwithinthe Council 244 , of Ministers on the Tyumen region sfailure to fulﬁ lthe plan. Nikolai

245 Maltsev, then oil minister, made astatementthat targets, were not

246 possible to meet due to lack of essential inputs, .According to his report,

247 in 1982 the State Supply Committee ( Gossnab) has, not fully delivered

248 evenallocated funds, .The shortageofbasic equipment of 1981 and 1982 249 had not been offset in the 1983 delivery plan.36 250 Furthermore, the constantundersupply was aggravated by the 251 rhythm of work of the Soviet bureaucracy. Normally,the second half of 252 the year was the time when major efforts were made to meet the plan 253 targets. But in the case of the oil industry such an approach simply did 254 not work.Equipment had to be delivered to the West Siberianwilderness 255 by the winter roads (po zimnikam )before April in order to be installed 256 oversummer. Everything delivered afterwards was extremely difﬁ cult to 257 install, let aloneuse within agiven calendar year.37 With the permafrost 258 turning into one big swamp, transportation of anything, not to mention 259 large-sized units, during summer or early fall very often resulted in the 260 lossofgoods.38 On topofthat, the oil industry sufferedbadly from the 261 All-Union energy saving campaignthat waslaunched across industries 262 without appropriate investment and prior preparationinorder to reduce 263 energy consumption. Under this programme the whole oil sector was 264 OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

188 Oil Counter-Shock

265 allotted only 1.4 billion KW of electricity that led to frequent electricity 266 outages on the production sites. As aresult,in1984 alone the Tyumen 267 oilﬁ elds experienced morethan 550 blackouts.39 After aseries of 268 discussions in the Council of Ministers, in April 1983 the head of the

269 Council Nikolai Tikhonov wrote to the State PlanningCommittee in a

270 very tense manner that the, 1983 plan for the Oil Ministryhad not been 271 correlated with technical and material resources, . 40 This letter should be , 272 seen as recognition the oil industry sproblems at the highestlevel.

273 Morethan that, this quote introduces yet another factor of the Soviet

, 274 oil crisi, samid plenty ,afactor of systemic, strategic importance. By the

275 early 1980s,the oil industry had been bestowed the honourable title of

, 276 the locomot, ive for industrial development .Inline with this general 277 understanding and given the almost insatiable thirst for cash of the 278 Soviet state, major ﬁ gures for the oil and gas sector were calculatedbased 279 on the amount of hard currency needed and not on the comprehensive ,

280 geological and technicalanalysis and industry performance. As Gadel 281 Vakhitov, then head of the Oil Ministry ResearchInstitute, put it the, 282 only waytomeet national oil production goals [of the 1970s and 1980s]

283 was to ignore approved methodsofrational exploitation of large 284 oilﬁ elds, . 41 285 Last but not least, the Soviet oil sector was under the pressure of 286 restrictedtechnology transferfrom the West. In 1983– 5, the overall cost 287 of imported equipment for drilling,exploration and development 288 decreased from 972 to 271 million rubles, which could, to alarge extent, 289 be explained by Western sanctions.42 Although it is difﬁ cult to evaluate 290 the possible effects incurred from the collapse of the technologies import 291 strategy, one of the main pillars of Soviet energy development since the 292 early 1970s, one cannot fail to notice that it wassynchronised with the 293 fall in production of 1984– 5. 294 At the same time, taking into account existingdomestic problems, 295 the role of US sanctions in the Soviet energy crisis should not be 296 exaggerated. Publicly, the Sovietsneglectedordenied their negative 297 impact, underpinning their thesis with the fact that the primary targetof OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

The Double Shock 189

, 298 US repressive, measures ,the Siberianpipeline, wasput into operation 299 withoutdelay in 1984. Nonetheless,archival documents contain 300 consistent and persistent references of the Soviet elite to the sanctions.

301 Already in 1982 during the meeting with the US Congressional Research

302 Service Vladimir Sushkov admitted that sanctions creat, ed additional

303 difﬁ culties for the Soviet oilmen , . 43 Great political sensitivity associated

, 304 with the repr, essive measures manifested itself once again in 1986, when 305 Milkhail Gorbachev mentioned the COCOM and restrictionsonthe oil 306 technologies during the pressconference after the Reykjavik summit: 307 308 You do not want to give us even oil equipment [ ... ]Atthe same , 309 time you want us to believe that you will share the SDI s[Strategic , 310 Defence Initiative s] results with us! It would be akind of second 44 311 American Revolution, and revolutions do not happen so often. 312 313 Oil Price Collapse: The Kremlin under the Sword of 314 Damocles? 315 The Soviet oil industry had already been under the heavy crossfi re of 316 slackening production and weakening demand when OPEC lowered its 317 offi cial prices in abid to stabilise the market. How did the Soviet offi cials 318 react to the unfolding counter-shock of the 1980s? Archival documents 319 reveal apuzzling picture: even abrief analysis demonstrates agap 320 between the understanding of the situation within academia and the 321 prevailing, or preferred, understanding on the political level. 322 The All-UnionScientifi cResearch Institute under the ForeignTrade 323 Ministry (abbreviated in Russian as VNIKI)was primarily responsible 324 for carrying out current marketanalysis for the respective ministry. 325 It produced weekly,monthly andquarterly reports On the Oil, Oil 326 Products, Natural Gas and Timber Markets,asnapshot of Soviet 327 academic opiniononthe subject matter. As could be predicted, the 328 1984 – 5reportsgavequite agloomyforecast for both oil and gas 329 markets, consistently emphasising the high supply and weak demand.45 330 The authors of the fi nal 1984report made it very clear that that the OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

190 Oil Counter-Shock

331 situation in the ﬁ rst half of 1985 waslikely to deteriorate further due

, 332 to, widespread practice of netback dealsand discounts . 46 In October , 333 1985 V. Sabel nikov, head of the international trade department of the 334 Institute, whilepresentingapaper MajorTrendsinthe Tradeofthe

335 WesternCountries:Implicationsfor theSovietInterests,drewthe following

336 conclusion: Th, ereisnoreasontoexpectany signi ﬁ cant positive changes 337 [for theUSSR – O.S.]inthe foreseeablefuture., 47 338 The expertcommunity was also raisingconcerns regarding the 339 possible risks of increasing involvement in the international oil trade, 340 especially because the Soviet Union, not being amember of OPEC, was

341 excluded from the oil-related decision-making process. V. Kominov, a

, 342 memberofthe famous Pr, imakov energy group , 48 had called for amore 343 proactiveapproachinthis direction already in 1975: 344 345 We must admit that indeed the world oil prices are not determined 346 by the USSR [ ... ]Our role in this ﬁ eld has always been rather 49 347 passive. The time has come to revise it. 348 349 As far as discussion at the ofﬁ cial level is concerned, the State Archiveof 350 the Russian Federation contains reports On the State of Economies of the 351 Capitalist Countries and the Situation on the Oil, Gas and Gold Markets 352 that were submittedquarterly by the SovietAcademy of Sciences to the 353 Council of Ministers. Notwithstanding the fact that the titles were almost 354 identical to those of VNIKI,thesereports differed substantially in their 355 conclusions and recommendations. The experts from the Academy of 356 Sciences were very accurate in their description of ongoing events. 357 However, their forecasts, being by and large optimistic, often contra- 358 dicted the contentofreports. For example, the authors of the last 1983 359 report pointedout that commercial and strategic oil stocks were on the

360 rise and that the gap between ofﬁ cial and contractprices had been

361 widening and then unconvincingly concluded that de, spite thesefacts, 362 OPEC will be able to maintain current prices, . 50 It is of principal 363 importance to notice that the VNIKI reports, which did not go beyond OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

The Double Shock 191

364 the operational level of the Foreign Trade Ministry, did not contain such 365 discrepancies. 366 As amatter of fact, the next 1984 winter report of the Academy of

367 Sciences once again reafﬁ rmed the questionable argument about OP, EC s 368 ability to keep abreastofthe oil market, . 51 Of course,aspricescontinued

369 their decline, this thesis wasdisavowed in the summer,although authors

370 without any justiﬁ cations or explanation wrote that in, any case, the 371 minimum level[of demand] has been passed through, . 52 372 How one can explain the appallingly poor qualityofthe materials 373 circulated amongthe membersofthe Council of Ministers? The ﬁ rst idea 374 which comes to mind is that at atime when the national economy was

375 increasingly relyingonoil revenues, to warnofimpending priceor

, 376 demand collapse would mean to challenge the, general line of the Party 377 that emphasised further development of the energy sector and oil trade 378 expansion.53 In light of this, it is both ironic and tragic that already in his 379 Tyumen speech,Mikhail Gorbachev criticised such adisservice of the 380 academic community, saying the following: 381 382 Over the years, research organizations of the industry have been 383 using their entire arsenal just to defend the existing status quo, 384 although they were not created as law bureaus under the 54 385 ministries. 386 387 There is no straightforward answer whether the Soviet elite would have 388 adopted different policy if the quality of analyticshad better reﬂ ected the 389 situation on world energy markets, especially at atime of uncertainty , 390 created by constantchanges of the leadership after Brezhnev sdeath. 391 However, the quote of Gorbachev doesimply that academia did not do a 392 good job.

393 The other side of the coin was that Sovietof ﬁ cials ﬁ rmly believedina

, 394 dogma about the unpredi, ctability of capitalism and therefore were not 395 fond of economicprojections, except for Soviet-styled planning. It was 396 Nikolai Patolichev, foreign trade minister, who admitted to Klaus Liesen, OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

192 Oil Counter-Shock 397 head of Ruhrgas AG, that he had, come to the conclusion that forecasts 398 are often producedbyincompetent people who are not involved in ,

399 productive labour [ sozidatel nyi trud], and can only criticize and forecast

400 instead, . 55

401 Yetthe mostimportant explanation of the Sovietreaction to the oil, 402 turmoil, of 1983– 5was hidden in the inability of the system and the 403 people within the system to recognise – or to believe in – the potential 404 inﬂ uence of fundamental changes of the global energy balance, including 405 energy intensiﬁ cation and saving programmes. In February 1983 the 406 Soviet ambassador to France wrote in amemorandum to the deputy 407 head of the Council of Ministers Ivan Arkhipov that over the lastfour 408 years the national energy saving programme enabled France to cut itsoil 409 import from 120 to 68 million tonnes.Inthe next paragraph, he also 410 reported that ELF Aquitaine, the main operator of French– Soviet oil

411 trade, had requested only100,000 tonnes of oil in 1983,incontrast with 412 1.5 million tonnes(!) in 1979. He explained this fact by the weakening, 413 of direct contacts between SoyuzNeftExport [theSoviet ofﬁ cial oil

414 exporting agency, well-known for its inefﬁ ciency and bureaucracy] and 415 French companies, , 56 without even mentioning the energy-saving 416 programme as apossible factor. Taking into accountthat adetailed 417 description of the programme wasprovided in the beginning of the same 418 document, the inability of the ambassador to embrace the structural 419 changes in oil consumption as adrive behindthe French import shift 420 becomes even morestriking. 421 Finally,eventhough the Sovietoil sector wasone of the ﬁ rst

422 industries to be affected by the worsening West– East political relations,

423 an argument about increasing, diffi culties in the majority of international 424 trade fl ows in timesofcrisis , 57 was often usedasanexplanation or 425 justifi cation for the deteriorating West– East trade. This disposition to 426 put the negative Soviet experience into abroader global context can be 427 found in archival documents as well as in offi cial propaganda.Ithas alot , 428 to do with the fact that since the early 1970s the USSR sintegration in the 429 global economy wasinvariably describedasanunconditional success OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

The Double Shock 193

430 and implementation of the socialist idea of the internat, ional division of 431 labour, . 58 432 In light of this prevailing way of thinking,the notion of possible costs 433 to be paid for being involved in the international trade in commodities 434 wasnot often addressed at the political or ideological level. In the same 435 vein,the Soviet political elite recognised the exponential expansionof 436 foreigntradeasthe main achievement of détente and therefore hardly 437 thought about the possibility of using oil or gas supplies as political 438 leverage. As Evgeny Primakov, one of the most prominentSoviet and

439 Russian intellectuals and policymakers, noted, in the 1970s and the

440 1980s there was aclear understanding that Sovie, tpower is based on 441 militarymight and political prestige, ,rather than on the successful use of 442 economic instruments.59 443 In other words, the experience of the Soviet energy sector in the mid- 444 1980s was predetermined by anumberoffactors: the tragedy of failing 445 production,including due to restrictions on technological import, the 446 Soviet planning systemwithits perception of the oil industry as an 447 inexhaustible fountain of currency and by the oil price collapse. 448 Nonetheless, the opinionthat it was ﬁ rst and foremost the 1986 counter- 449 shockthat causedthe Soviet empire to collapse is very common. 450 Russian collectivememory explains the dramaticdevelopments in 451 the energy realm in 1985– 6asaconspiracy between Saudi Arabia and

452 the United States: aconspiracy primarily directed against the USSR. The

, 453 obsession with the idea that Ame, ricans are leading from behind 454 manifested itself in the notes left by Nikolai Tikhonov,head of the 455 Council of Ministers,onthe pages of the last 1985 report of the Academy 456 of Sciences. Amongall of the reasons that caused the oilprice decline, 457 including the milestone decision of Saudi Arabia to cease acting as a 458 swing producer, he used ared pen to markthe onlyparagraph about the 459 US test sales of approximately 5million barrels of oil from the Strategic 460 Petroleum Reserves.60 In 1987,inthe speech at the fateful June Plenum 461 that promulgated perestroika as an ofﬁ cial ideology, Mikhail Gorbachev 462 for the ﬁ rst time blamed his predecessors for wasting petrodollars and OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

194 Oil Counter-Shock

463 buying consumer goods instead of carryingout amuch-needed complex

464 economicmodernisation. 61 He alsostressedthat the cost of the illusive

465 prosperity of the1970s hadnot been justiﬁ ed ,socially and 466 economically, . 62 Likewise, The Concept of the XXVIII Party Congress 467 Report (1989) put the oil price collapse well before fundamental ﬁ nancial 468 miscalculations or mismanagementinthe list of factorsthat caused , 469 perestroika sfailure. 63 470 In other words, it was the Soviet elite who already at the inception of

471 perestroika shaped and incorporatedinto the public discourse the notion

, 472 of adirectconnection between the end, of the oil money and Soviet 473 economicdifﬁ culties. In the beginning it was used in order to explain 474 the poor resultsofongoing reforms, while later it becamethe reason for , 475 perestroika scollapse. 476 477 Conclusion

478

, In 2006 Yegor Gaidar, the father of the Russian shock, therapy ,i.e. 479 radical economic liberalisation of the early 1990s, presentedhis book 480 Collapse of an Empire,wherein great attention was given to the impact of 481 the oil price collapse on the Soviet ﬁ nancial and economicsystem.

482 He argued that the main purpose of his workwas to, show the reader that 483 the Soviet political and economic system was intrinsically unstable.The

484 only question was when and how it would collapse. , As this paper reveals, 485 the Sovietleadership wasawareofthe difﬁ cult situation in the 486 energy industry and sawthe developments on global oilmarkets, but 487

it wassimply unable to deal with the rising costs of increased Soviet

488

, involvement in the world energy tradeinabusiness-like, capitalist, 489 manner. The quasi-socialist system of the late USSR was alsounable to 490 perform much-needed reforms of the energy industry, which almost 491 universally led to privatisation. It took the dissolution of the USSR and 492 creation of New Russia to make this happen. 493 , Backin2006, Gaidar sbook turned out to be abestseller. It is an open 494 question as to whether its subtitle, The Lessonsfor Modern Russia,had 495 OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

The Double Shock 195

496 something to do with its success. Yet, striking parallels between the 1986 497 and current oil price turmoil, accompanied by areturntoCold War 498 rhetoric and practice,cast serious doubts on the lessons learned.64 499 500 Notes 501 1. Marshall I. Goldman, The Enigma of Soviet Petroleum: Half Empty or Half 502 Full? (London, 1980); Marshall I. Goldman, Petrostate: Putin, Power, andthe 503 NewRussia (Oxford, 2008); AnitaOrban, Power, Energy,and theNew Russian Imperialism (Westport, 2008); JeronimPerovi c, Robert Orttungand Andreas 504 Wenger, RussianEnergyPower andForeign Relations (London, 2009). 505 2. Margaret Chadwick, David Long and Machiko Nissanke, Soviet Oil Exports: 506 Trade Adjustments, Reﬁ ning Constraints and Market Behaviour (Oxford, 1987); Thane Gustafson, Crisis amid Plenty: The Politics of Soviet Energy 507 under Brezhnev and Gorbachev (Princeton, 1989); Id., Wheel of Fortune: The 508 Battle for Oil and Power in Russia (Cambridge, 2012); Maria Slavkina, 509 Triumf iTragediya: Razvitie Neftegazovogo Kompleksa SSSR V1960– 1980-e gody [Triumph and Tragedy: Soviet Oil and Gas Industry in the 1960s and 510 1980s] (Moscow, 2002).

511 3. Per Högselius, Red Gas: Russia and the Origins of European Energy , 512 Dependence (London, 2013); Jeronim Perovicand Dunja Krempin, The key

is in our hands: Soviet energy strategy during Détente and the global oil 513 crises of the 1970s, , Historical Social Research xxxix/4 (2014), pp. 113– 44. 514 4. Slavkina, Triumf iTragediya,p.126. 5. Russian State Archive of the Economy (hereafter RGAE), Moscow, f. 413, 515

op. 32, d. 3648, l. 207.

, 516 6. Perovica nd Krempin, The, key is in our hands . , 517 7. Mikhail Gaykazov, Valentin Dmitriyevich Shashin – Bistatel nyy Strateg Neftyanoy Promyshlennosti [Valentin Dmitriyevich Shashin as aBrilliant

518

Strategist of the Oil Industry] (Moscow, 2006), p. 274.

, 519 8. Intelligence Memorandum, Impeding, Soviet Energy Crisis ,March 1977,

520 NLC 12– 59– 1-2– 1, Jimmy Carter Presidential Library, Atlanta, GA

(hereafter JCL); State-Treasure, Assessment of the CIA Prognosis for Soviet

521 Oil Production, ,27December 1977, NLC 29– 10– 7-7– 5, JCL; National

, 522 Security Council Memorandum, Roundtable, on the Soviet Economy ,

523 26 August 1977, NCL 12– 57– 2-11– 2, JCL.

, 9. Central Intelligence Agency, Prospects, for Soviet Oil Production ,1977, ER- 524 10270. Availableathttps://www.cia.gov/library/readingroom/docs/CIA-

525 RDP08S01350R000602080002– 0.pdf (accessed 25 July 2017); Staff Report of the Senate Select Committee on Intelligence of the US Senate, The, Soviet

526 Oil Situation: An Evaluation of CIA Analyses of Soviet Oil Production, , 527 No. 28– 025 (1978). Available at https://www.intelligence.senate.gov/sites/ 528 default/ﬁ les/publications/95soviet_oil.pdf (accessed 25 July 2017). OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

196 Oil Counter-Shock

529 10. Memo, Soviet Purchase of Western Oil and Gas Equipment,15March 1978, NLC 12– 41– 7-13– 2, JCL. 530 11. The announcement came as areaction to the Sharansky trial, when a

531 prominent Soviet opposition activist was sentenced to prison.

532 12. Jimmy Carter, Exports, of High Technology and Other Strategic Items to the Soviet Union Memorandums from the President, ,8January 1980, in 533 University of California at Santa Barbara American Presidency Project 534 (APP). Available at www.presidency.ucsb.edu/ws/index.php?pid¼ 33008& 535 st¼ &st1%28 (accessed 17 October 2016). 13. Comments of the European Communities on the Amendments of 22 June 536 1982 to theUSExportregulations (12August1982).Availableatwww.aei.pitt. 537 edu/1768/1/US_dispute_comments_1982.pdf(accessed17October2016). 538 14. The Coordinating Committee for Multilateral Export Controls (COCOM) was created in 1949 as the main watchdog to exercise control over transfer of 539 strategic goods and technologies to the Eastern bloc. 540 15. This is aquote of the US Secretary of State George Shultz, cited in: Archive of Foreign Policy of the Russian Federation (hereafter AVP RF), Moscow, 541

f. 129, 1985, op. 71, p. 441, d. 46, ll. 9 – 10.

542 16. Kennedy School of Government Case Program, CIA, and the Fall of the

,,, , 543 Soviet Empire: The Politics of , Getting it Right .Available at www.foia.cia. gov/sites/default/ﬁ les/DOC_0005302423.pdf (accessed 23 October 2015). 544 17. Avery detailed account of the systemic reasons for the Soviet energy crisis

545 can be found in Gustafson, Crisis amid Plenty.

546 18. CIA National Foreign Assessment Center, The, Soviet Comments on CIA Energy Projection, ,March 1978, NCL 12– 41– 7-11– 4, JCL.

547 19. Ibid.

, 548 20. Puti, povysheniye effektivnosti kap vlozheniy vneftyanuyu promyshlennost 549 [Ways of improving efﬁ ciency of capital investments in the oil industry],

Neftyanoye Khozyaystvo [Oil Industry] 8(1975), pp. 1 – 2; V. Fedynskiy,

550 Problema, povysheniya effektivnosti ikachestva geoﬁ zicheskikh rabot na

, 551 neft, igaz [On the need to increase efﬁ ciency and quality of geophysical survey in the oil and gas industry], Geologiya nefti igaza [Geology of Oil and

552

Gas] 11 (1977), pp. 10– 15; K. Syromyatnikov, Km, etodike otsenki 553 ekonomicheskoy effektivnosti novoy burovoy tekhniki, [Evaluating econ- 554 omic efﬁ ciency of the new drilling equipment: methodological aspect], EkonomikaNeftedobyvayushcheyPromyshlennosti [Economy of Oil 555 Production] 2(1978), p. 3 – 4.

, ,

556 21. P. Sapozhnikov, Aktual, nyye problemy ekonomiki kapital nykh vlozheniy 557 na sovremennom etape razvitiya neftyanoy promyshlennosti, [Urgent problems of economy of capital investments at the present stage of 558 development of the oil industry], Ekonomika Neftyanogo Khozyaystva

559 [Economy of Oil Production] 10 (1977), p. 34.

560 22. I. Ponomareva, Sovershenstvovaniye, metodiki otsenki ekonomicheskoy effektivnosti razrabotki neftyanykh mestorozhdeniy Zapadnoy Sibiri, 561 OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

The Double Shock 197

562 [Improving evaluation of economic effi ciency of the West Siberian oil fi elds development], EkonomikaNeftyanogoKhozyaystva [Economy of Oil 563 Production] 7(1978), p. 18. 564 23. Gustafson, Crisis amid Plenty,p.66. 565 24. Archive of the Gorbachev Foundation (hereafter AGF), Moscow, f. 2, op. 1, d. 21584. 566 25. Archive of the Russian Academy of Sciences (hereafter ARAN), Moscow, 567 f. 1916, op. 1, d. 17, l. 2. 568 26. The State Archive of the Russian Federation (hereafter GA RF), Moscow, f. 5446, op. 142, d. 439, ll. 5. 569 27. Chadwick, Long and Nissanke, Soviet Oil Export,pp. 131 and 144. 570 28. RGAE, f. 413, op. 32, d. 4193, l. 79. 571 29. RGAE, f. 413, op, 32, d. 4110, l. 34. 30. RGAE, f. 413, op, 32, d. 4107, l. 180. 572 31. One of the main Russian export arteries, it was featured during the Russian– 573 Ukrainian gas wars. 32. RGAE, f. 413, op. 32, d. 977, l. 115. 574 33. RGAE, f. 413, op. 32, d. 3590, l. 16. 575 34. RGAE, f. 413, op. 32, d. 3590, l. 41. 576 35. RGAE, f. 413, op. 32, d. 4193, l. 237. Eventually, the fi rst oil well appeared on the Sakhalin Island only in 1989, and the LNG plant was built only in 2009. 577 36. GA RF, f. 5446, op. 142, d. 439, l. 5. 578 37. Thus, in 1984, only 383 objects out of planned 437 had been built, and 579 majority of them were fi nished in December: GA RF, f. 5446, op. 145, d. 505, l. 142. 580 38. P. Kuvshinkin, an oilman, worked in West Siberia in the 1970s and the 581 1980s, in discussion with the author, Volgograd, 29 July 2014. 582 39. GA RF, f. 5446, op. 145, d. 506, l. 37.

40. GA RF, f. 5446, op. 142, d. 439, l. 62. 583 41. G. Vakhitov, Neftyanaya promyshlennost, Rossii: vchera, segodnya, zavtra 584 [The oil industry of Russia: yesterday, today, tomorrow] (Moscow, 2012), p. 497. 585 42. Vneshnyaya torgovlya SSSR. Statisticheskiy sbornik [USSR Foreign Trade. 586 Statistics], 1980– 1985 (Moscow, 1981– 1986).

587 43. RGAE, f. 413, op. 32, d. 2262, l. 61. 44. MikhailGorbachev,TelevisionAddress, ,TheResults of theSoviet – American

588 Summit in Reykjavik , ,AGF. 589 45. RGAE, f. 413, op. 32, d. 3649; d. 4198; d. 4685. 590 46. RGAE, f. 413, op. 32, d. 4198, l. 29. 47. RGAE, f. 413, op. 32, d. 4199, l. 122. 591 48. This Task Force was created within the most inﬂ uential Soviet think-tank, 592 the Institute of World Economy and International Relations (IMEMO), in 593 order to consider the outcomes of the Arab oil embargo. 49. ARAN, f. 1978, op.1, d. 455, l. 56. 594 OCS Chapter9— 1/2/2018— NANDHINI.P— 571971— IBTauris

198 Oil Counter-Shock

595 50. GA RF, f. 5446, op. 144, d. 1256, ll. 2 – 20. 51. GA RF, f. 5446, op. 144, d. 1255, l. 113. 596 52. GA RF, f. 5446, op. 144, d. 1255, l. 135.

597 53. In 1983, the ﬁ rst Soviet comprehensive Long-Term Energy Program was 598 adopted where it was clearly said that while, adhering to the politics of further expansion of export in machinery and manufactured goods, the 599 Soviet Union at the same time does not pursue the goal to cease export in

600 commodities. Calculations show that commodities will play asigniﬁ cant role 601 in the export, :inRGAE, f. 413, op. 32, d. 3648, l. 221. 54. AGF, f. 2, op. 1, d. 21584. 602 55. RGAE, f. 413, op. 32, d. 3581, l. 31. 603 56. AVP RF, f. 197, 1983, op. 67, p. 308, d. 15, l. 16. 604 57. RGAE, f. 413, op. 32, d. 3648, l. 235. 58. XXV Party Congress. Stenographic report, p. 81. 605 59. Evgeny Primakov (Director of the Russian Foreign Intelligence Service, 606 1991– 6, Minister of Foreign Affairs 1996– 1998, Prime Minister, 1998– 1999) in discussion with the author, Moscow, 29 July 2014. 607 60. GA RF, f. 5446, op. 147, d.1079, l. 58.

608 61. Report at the Plenary Meeting of the Central Executive Committee of the Soviet UnionCommunist Party, ,Ozadachakh partii po korennoy

609 , perestroyke upravleniya ekonomikoy, [On the Party stasks to radical 610 reconstruction of the economic management], AGF. 611 62. According to Slavkina, in 1965– 85 grain import grew by 1000 per cent, while 612 clothing and leather goods import grew by 640 and 550 per cent in 1973– 85 respectively: Slavkina, Triumf iTragediya,p.132. 613 63. AGF, f. 2, op. 1, d. 8318. 614 64. Agnia Grigas, Beyond Crimea: The New Russian Empire (New Haven, 2016); 615 Marvin Kalb, Imperial Gamble: Putin, Ukraine, and the New Cold War (Washington, DC, 2015); Walter Laqueur, Putinism: Russia and Its Future , 616 with the West (New York, 2015); Edward Lucas, The New Cold War: Putin s 617 Russia and the Threat to the West (New York, 2014). 618 619 620 621 622 623 624 625 626 627 OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

1 2 3 4 5 6 10 7 8 9 10 TheCounter-Shock in Norwegian 11 OilHistory 12 13 14 Einar Lie and Dag Harald Claes 15 16 17 The Norwegian economy has always been rich on energy.From the late

18 1800s, large waterfalls have supplied householdsand heavy industry with

, 19 low cost hydro-electric energy,today labelled as renewable, .Largeoil

20 ﬁ elds on the Norwegian Continental Shelf were discovered around the

, 21 timeofthe oil, shock in 1973. The fast-growing petroleum sector had 22 ahugeimpact on Norwegian trade, incomes and economicpolicies, 23 but hardly on domestic energy allocation and consumption, which 24 continued to rely on hydro-electric power. The counter-shock in 1986 25 still had large and longlasting consequences for the Norwegian economy 26 and economicpolicymaking. The oil riches had had astrong inﬂ uence on 27 public and political debate and perceptions from the mid 1970s. 28 Governmentand private spendinggrew rapidly, especially in the years 29 1974 – 7and 1981– 5. Partsofthe existing industry suffered from the 30 economic downturn,generallylow productivity and arapid growth 31 in wages, partly causedbythe new oil riches. The counter-shock 32 highlightedthe oil dependency of the Norwegian economy.Among its 33 consequences were anumberofstrong contractionary measures, closures OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

200 Oil Counter-Shock

, 34 of state-owned enterprises, deregulation of energy markets etc. Norway s 35 attitude to OPEC cooperation changed too. Prior to 1986 Norway chose 36 not to engage in any kind of discussions with OPEC connected to 37 regulationofproduction volumes. After the counter-shock, Norwegian 38 authoritiesengaged in discussions with OPEC and contributed to 39 reductions in production and sales volumes. 40 41 Background: Oil Production in aCountry Rich on 42 Hydro-Electric Power 43 , 44 Norway soil historystartslate. The fi rst, andstill oneofthe largestoil 45 fi elds on theNorwegian ContinentalShelf,Ekofi sk,was foundlatein1969. 46 During the1970s,1980s and1990sanumber of new fi elds were discovered 47 anddeveloped.Productionofoil andgas from theNorwegian sector of the 48 NorthSea climbedsteadilyfromthe 1970s untilthe mid-1990s, when 49 growth fl attened out. Theeconomicsignifi canceofthe sector grew from 50 zero in 1970 to represent37.6per cent of totalexports and18.7per cent of 1 51 GDPin1985. Thelarge pricemovements on petroleum – theshocksof 52 1973 and1979 – 80,and thecounter-shock in 1986 – thus hadamajor 53 impact on Norwegiannationalincomeand economic policies. 54 The effects on energy policiesand compositions were, however, less 55 dramatic. This is mainly due to the fact that Norway evenbefore the oil 56 discoveries wasanation rich on energy. Norway was industrialised from 57 the late 1800sonheavy energy-intensive electrochemical industry,based 58 on rich powersupplyfrom Norwegian waterfalls. Postwar industrial 59 policies, aimedatarapid increase in the size of manufacturing industry, 60 were also based on electricity in abundance. Furthermore, all electricity 61 in Norway was produced from waterfalls,whereas carbon-basedfuel has 62 never played any role in the production of electricity in Norway. 63 Petroleumwas used, of course, in transport and partly in heating, with 64 electricity as an alternative source.The large production of electricity 65 from waterfalls still played avital role in moderatingthe effects of rapid 66 price movements of petroleum on domestic demand and production. OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

The Counter-Shock in Norwegian Oil History 201

67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 Figure10.1 Energyconsumption in Norway by sources, 1977– 2000. , 85 In a30-year perspective from theearly 1970s, electricity sshare of total 86 energy consumptioninNorwayhas grownsteadily. Theprice jumpsin 87 1973– 4and 1979– 80 probably supportedanincreasedproductionof 88 electricity in the1970s.Questionsregarding regional developmentand 89 furtherindustrialgrowthonthe oneside, andenvironmental concerns 90 around newdam projects on theother were probably more important 91 than theoil pricefor thepaceofgrowthintotal electricity production.The 92 developmentofahigh capacity transmissiongridinthe 1960smadeit 93 possible to supply almost allconsumers with electricityatverylow 94 marginal costs. Thus,the hydropower basedelectricity took an increasing 95 shareoftotal energy consumptionthroughoutthe 1970sand 1980s. 96 In alongerperspective,the steady increase throughall threedecades – 97 1970s, 1980sand 1990s – dominatesthe picture. Having coveredthe 98 investment costsofthissystem, no otherenergysourcecould compete 99 with thehydro-based electricityfor householdheating,cooking andlight. OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

202 Oil Counter-Shock

100 As mentioned, also alarge shareofNorwegian industry wasbased on this 101 low-cost electricity. It followsthatthe counter-shock in 1986 hadalmost , 102 no effectondomesticenergyconsumption.Oil sshare of energy use 103 actually grew substantiallyin1985,beforethe counter-shock,the growth 104 wassmaller in 1986,thenwehad asubstantial reduction(39 percent) in 105 consumptionofpetroleum products in 1987 to 1992.We ﬁ nd,inthe same 106 years, an increase in theproductionofelectricity andareductioninenergy 107 consumptionasawhole, whichatleast partly must be explainedbythe 108 poor performanceofthe Norwegianeconomy in thelate1980s andearly 109 1900s(seebelow). In the1970s,the production of oiland gasonthe 110 ContinentalShelf became asourceofanewindustrialdevelopment,but 111 therewas little need forthe energy in Norway.Itbecame, andhas always 112 remained,anexportsectorgeneratingincome, butwithlittleimportance 113 forthe Norwegianenergysystem. , 114 Thesebasic elements of Norway soil andenergyreliancewillalso 115 providethe elements of theanalysisinthiscontribution. We will startby 116 presenting theframework forgovernmentcontrol of theoil industry and 117 howthisdeveloped in the1970sand early1980s. In afollowing section the 118 perspectives andguidelinesfor howoil incomesshouldbeincorporated 119 into theNorwegian economyinthe 1970swillbepresented.These 120 principles were,however,bynomeans followed.The domestic economy 121 expanded rapidlytowards themid-eighties. Thecounter-shock in 1986 122 createdahuge deﬁ citinthe Norwegiancurrent accountbalance.The 123 politicalresponsewillbepresentedinthree areas: Anew approach to 124 OPEC andcooperationwithother oilproducers,aless protectionist 125 regime in ordertomotivatethe largeinternationalstoremaininthe 126 Norwegianoil sector;and therapid tightening of economic policies and 127 abandonmentofavast amount of postwarregulations in vitalmarkets. 128 129 State Control 130 Before oil was discovered in 1969the Norwegian government was 131 reluctant to engage in oil exploration on the Norwegian Continental 132 OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

The Counter-Shock in Norwegian Oil History 203

133 Shelf. It wasconsidered avery risky businesswhere Norway had no 134 competence whatsoever.2 In afamous Report to Parliament from 1974 135 the Norwegian governmentdiscussed the consequencesofthe oil 136 discoveries on the Norwegian society at large.3 The importance of 137 democratic control and state engagement in all part of the petroleum 138 industry were spelledout. Likewise, the report emphasised the aim to use 139 the oil revenuesfor greater equality in living standards, prevention of

140 social problems and to develop an industrial production for the future.

, 141 The report elaborated the so-called 10, oil commandments spelled out in 142 abrief report to Parliament in 1971.4 With the creation of Statoil in 1972, 143 the state participation agreements with the IOCs were amended to 144 include a50per cent directshare to be granted to Statoil in every block, 145 in addition to acarried interestclause.Statoil thus would be exempted 146 from incurringexpenses during the exploration phase. At the Gullfaks 147 ﬁ eld Statoil was awarded an 85 per cent share.The carried interest 148 concept enabled the state to combinearisk-averse posture with avery 149 high direct state ownership share. Since the voting rights were based on a , 150 company sownership share, Statoil had veto power overall production 151 leases and ﬁ eld development decisionsthat were made after 1973.5 The 152 international oil companies operating on the Norwegian Continental 153 Shelf accepted this de facto nationalisation, partly due to lack of 154 alternativesafter the nationalisation of the petroleum industry in the 155 Middle East during the 1970s. 6 156 On the international scene,the early 1970s sawachange in the 157 relationship between the producing countries and the IOCs. Some 158 countries, like Iraq, nationalised the oil company operatingwithinits 159 borders, while others, such as Saudi Arabia, followed amoremoderate 160 strategy and negotiated astate participation agreement. The Norwegian 161 model amount to alegislative framework givingthe state the ultimate 162 control overthe resources, apolitically governed concession system,and 163 astrong elementofdirect state participation through the state oil 164 company – Statoil.The Norwegian model had certain peculiarities but 165 wasbasically in linewith the international trend. OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

204 Oil Counter-Shock

166 Probably withoutany directconnection, the Norwegian model is

167 quite similar to the idea spelled out by Raymond Vernon in his so-called

, 168 Obs, olescing BargainingModel . 7 Vernon sees the relation between IOCs 169 and host states as abargaining game where the upper hand changes. First 170 the IOCshavethe upper hand,because the host country is unable to 171 build apetroleum industry from scratch on its own. Thusthey have to 172 give the IOCslenientconditions in ordertohave them invest in oil 173 exploration. As discoveries aremade and the companies havemade their 174 investments the upperhand in the game changes to the host country, 175 since the investments, in particularinthe oil business, are sunk costs. 176 An offshore production platformisusually designed for aparticular fi eld 177 and can hardly, if ever, be moved to another fi eld. The company will 178 therefore have to accept the conditions of the host country or forfeit 179 future profi t. Norway took advantage of this, helped by nationalisation in 180 the Middle East and increased oil prices in the 1970s. 181 182 Oil Riches in the Domestic Economy 183 New discoveries and the oil price jumpsin1973– 4and 1979– 80 made it 184 clear for the Norwegian public and politicians that incomes from 185 petroleum would be verylarge in the decades to come. The following 186 debate on how production and incomes should be handled wascoloured 187 by the Dutch experience of the 1960s, where tradable sectors (except for 188 petroleum itself) suffered from the deterioration of competitiveness 189 caused by alarge domestic spending of incomefrom the newly 190 discovered natural gas.8 The strategy chosen by Parliament in 1974 was 191 to spend revenueasitaccrued butcontrol the rate of development and 192 , production to matchthe domestic economy scapacity to absorb the oil 193 income without atoo strong deterioration of competitiveness and 194 crowding out of the business competing with foreign producers. 195 Norwegian spending didnot,however, follow therelatively 196 disciplined guidelines formulated in 1974.The chief of the Central 197 Bank of Norway stated in awitty remark in 1988 that Norway in the mid 198 OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

The Counter-Shock in Norwegian Oil History 205

199 1970s set, an excellent course,and then immediately took off in another 200 direction, . 9 We will in the following section summarise some key features 201 of the economicdevelopment and economicpolicies in Norwayinthe 202 decade before the counter-shock. 203 The fi rst problem was that oil income grewfaster than Government 204 authorities had anticipated when the framework for domestic spending 205 of oil revenues was made in 1974.New discoveries were made. It became, 206 in practice, diffi cult to regulate, or to delay the development of new fi elds 207 after their discovery. The strong actors in the oil sector, including trade 208 unions, successfully pushed for rapid development and high activity. The

209 process is summarised in political scientist Johan P. Olsen sterm

210 petrolisa, tion ,which denotes adevelopment opposite to one determined

211 by rational, hierarchical planning: The pet, rolisation resulted in a 212 situation eve, ryone had wanted to avoid [ ... ]Confronted with strong 213 interest groups, the political systemisnot able to formulate common 214 measures as afoundation for coherent policies. The political authority is

215 weakly developed, all matters are politicised, and the State becomes 216 fragmented., 10 217 The higher pace of production and the new price jumps in 1973 and 218 1979/1980 created higher incomes for government to spend. The basic 219 structure of the Norwegian political economy changed considerably in 220 these years, as acombined result of the new, or rather anticipatedwealth, 221 and anumberofother factors: The international economicsetback from 222 around 1974 was met with overly large doses of expansionary policy, and 223 the policy was maintained for too long.11 Thus, prices and costs rose 224 rapidly, and large trade deﬁ cits emerged in 1975,1976 and 1977.This 225 process was reversed after 1978,resulting not onlyinreduced inﬂ ation 226 rates but alsoreduced GDP growth and an emergingunemployment 227 probleminthe early 1980s.12 Yet, the expansionary climate in Norwegian 228 politics had both causesand effects that cannot be seen solely as the 229 outcomeofcounter-cyclical policy as such.Wages rose at an 230 unprecedented speed – the average hourly pay in manufacturing 231 industry increased by 25 per cent in 1973,13.5 per cent in 1974, and 15 OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

206 Oil Counter-Shock

232 per centin1975.Some economic sectorswere given heavy economic 233 support groundedinvarious regional policy considerations or speciﬁ c 234 social policy aims, which neither before nor since havecarried any weight 235 in the formulation of economicpolicies. And several very costly reforms 236 were carried throughinashorttime, sometimeswithout any 237 administrative preparation.13 238 Anew elementinthe planningand policymaking in the middle of 239 the 1970swas the weakening of ordinary procedures and division of 240 tasks between ministries, cabinet and parliament. The positionofthe 241 Ministry of Financevis-à-vis the other ministries was weakened. 242 Parliamentbecamethe important driving force in suggesting and 243 planning expensive reforms. The ﬁ rst package with counter-cyclical 244 policies in the spring of 1975 was presentedthrough normal procedures

245 from the government, but then Parliament becamemuch more active. 246 As historian Harald Espeli has pointedout, the, Ministry of Finance 247 started the supportofindustry but soon lost control. Parliamentgot

248 steadily more self-opinionated confronting agovernment that did not 249 even have astrong support withinits one party., 14 250 The aforementioned development is not explicitly related to the oil 251 sector or activity.But the expected future revenues from the sector were 252 an important elementinall political debates from the mid 1970s to the 253 mid-1980s. It was particularly obvious in the seventies.Both labour 254 unions and governmentreferred to future incomes in the extremely 255 expansive income settlements in which high nominal wage increases and 256 tax reductions were combined. Economic policies in the early eighties 257 had adifferent agenda, as the Conservative party replaced the Labour 258 Party in the cabinet offi ces after the election in 1981. Liberalisation of 259 credit markets, of industrial policies, of production of utilities, market for 260 housing etc. was on the agenda, along with areduction in gross taxes and , 261 the public sector sshare of GDP. Parts of the deregulationswere 262 implemented. Most signifi cant wasthe half-hearted liberalisation of the 263 credit markets. The government fi rst removed quantitative regulationof 264 credit; still the interest rates were held at aregulated low level, and the tax OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

The Counter-Shock in Norwegian Oil History 207

265 system subsidiseddebtors by verygenerousrules of deduction.15 The 266 combination of these elements led to acredit-fuelled expansionin1984, 267 1985and early 1986, with historically high rates of investments and 268 consumption. The monetary expansionwas supportedbygrowingpublic 269 expenditures in the mid-1980s. For the latter, referencestopresent and 270 future oil incomes played an important role in creating an expansionary 271 climatefor alldiscussions around government budgets and 272 expenditure.16 Both monetary and ﬁ scal policies had apro-cyclical 273 effect and reinforcedageneral business cycle upturninthe ﬁ rst half of 274 the decade. 275 The combined effect was arapid growth in domestic wages.When 276 other factorsfailed to rein in losses in growth in costs and wages,

277 changes in the exchange rate were used to increase competitiveness. The

278 years from 1976 to 1986 have been labelledthe devalu, ation decade .

279 Ahighnumberofexplicit devaluations and so-called tec, hnical 280 adjustments, on how the value of the krone should be calculated on 281 the basis of other currencies were carried out, most intensely from 1982 282 and onwards. In the short run,competitivenesswas improved, but 283 inﬂ ation and inﬂ ationary expectations rose as aconsequenceofthe series 284 of devaluations. 285 286 Oil Production and OPEC Relations before 1986 287 In addition to state control over the Norwegian oil sector and the 288 macroeconomiceffects of oil income, alsoNorwegian foreign economic 289 relations changed due to the oil discoveries. Norway rapidly found itself 290 having common interests with agroup of countries Norway had had very 291 little contact with at all – namely other oil exporters, in particularthe 292 members of OPEC. 293 In retrospect, it is commonknowledge that the price increase of 294 1979 – 80 overshot what the market could swallow and the OPEC

295 ministers misread the situation: when, OPEC supplies started to decline 296 sharply in 1981 and 1982,asaresult of the fall in demandand the rise in 297 OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

208 Oil Counter-Shock 298 non-OPEC supplies, we recognised too late that oil was overpriced, . 17 In 299 March 1982, the organisation initiatedthe quota-sharing systemamong 300 its members, and the ﬁ rst contacts with Norway and Britain were taken 301 in order to have thesenew oil producers help limit oil supplies and 302 balance the market. The initial reaction was that Norway wasatoo small 303 producer to matter,and that itsproductioncosts made it necessaryto , 304 always produceatcapacity level. By August 1984,Saudi Arabia s 305 production haddeclinedtojustabove 4mb/d, whileOPECtotal 306 production wasaround16.5mb/d. Just as OPECprepared an 307 extraordinarymeeting on 28– 9October 1984,Norwayentered the

308 internationaloil arena, by offering an ofﬁ cial reductioninprice of about 309 adollarand ahalf:18 ac, risisnobodyhad expected,not even thosewho 310 triggered it off, thedirectors of theNorwegian stateoil companyStatoil. , 311 TheOPECconferencethathad been called to raisethe organisation s

312 production ceilingwas in fact forced to loweritby1.5 millionbarrels a

313 day, in adesperate attempttosaveoil prices from theNorth Seaturmoil. , 19 314 The immediate reaction in OPEC wasstrong: Norw, ay received , 315 rough treatmentinFriday sUAE newspapers. Gulf News writes that the

316 Norwegian decision to reduce the price of North Sea oil is extremely 317 difﬁ cult to understand., 20 On 26 October 1984, Saudi Oil Minister 318 Ahmed Zaki Yamanicame to Norway for talks with Prime MinisterKare 319 Willoch and Minister of Oil and EnergyKare Kristiansen. They assured 320 that the Norwegian step wasanadjustment to market realities and not an , 321 attempttoundermineOPEC sattempt to stabilisethe market. 322 Kristiansen assured Yamanithat Norwegian production in 1985 would 323 not exceed that of 1984. 21 This turned out not to hold true. The Saudi

324 Arabian weekly magazine Igraa ran an article in the 15 Novemberissue

, 325 entitled The, Latest OilPrice Crisis: ASaudi View .Probably the views 326 were those of Yamani. The articlestates that demand waspicking up in 327 the lastquarter of 1984, until the 328 , 329 big surprise – Norway sdecision to reduce its price by $1.35/b ... . , 330 10 days before Norway sdecision, the prevailing Norwegian view OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

The Counter-Shock in Norwegian Oil History 209

331 was that theprice of oilwould begintoriseinNovemberand 332 December as demand increasedand that therewould be no 333 problems on prices or productionuntilMarch or April. Therefore, theNorwegian decision wasbased on non-economic 334 considerations.NormallyNorwaydoesnot take theinitiativeon 335 pricingbut followsthe Britishlead. It is remarkable that in this case 336 thesmaller producer took theinitiative [ ...]Somepeoplebelieve 337 that internal reasonswerebehindthe Norwegiandecision, sincethe 338 Presidentof[...]Statoilbelongs to theoppositionpolitical party 339 andwantedtoembarrass thepresent government [ ...]There are also thosewho saythatthere was American pressure on Norway. 22 340

341 , 342 Laterthe same month Yamanicommented: Id, on tcare about what

343 Norway will do. The situation will right itself when demand increases , 23 344 and the market improves. This did not happen. With this October 345 crisisof1984,the Norwegian innocence in the political game of 346 international oil was gone. The argument used that Norway, as a 347 marginal producer, had no infl uence on the international oil market, was 24 348 no longer credible. Norway hadshown that it could, in 349 certain situations, actually infl uence marketdevelopments. On the 350 other hand, the high production costs continued to be an applicable 351 argument for self-commitment. To agreat extent, bargaining power 352 involves depriving oneself of alternatives of action. Until the pricecrash 353 of 1986, Norway insisted that any cooperation with OPEC wasout of the 354 question simply becausethe highproduction costs in the North Sea 355 prohibited any reduction of capacityutilisation. 356 357 The Price Crash of 1986 358 During the fi rst half of the 1980s the world market price for crude oil , 359 showedadownward trend. However, the oil producers incomefrom 360 exports was propped up by the increase in the dollar exchangerateinthe 361 fi rst half of the 1980s,occurring as aconsequence of the aforementioned 362 devaluation policies. From 1980 to 1985 the oil priceincreased when 363 measured in Norwegian kroner (NOK)but fell in US dollars. When the OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

210 Oil Counter-Shock

364 oil price and the dollar fell simultaneously in 1985– 6, the oil price 365 measuredinNorwegian kroner washalved.25 With the oil price collapse 366 in spring 1986,the valueofthe exports of oil and natural gas fell by NOK 367 32.3 billion from 1985 to 1986. Paid taxes from the oil sector fell from 368 NOK 71 billion in 1985toNOK 16 billion in 1988. 26 369 The conservative– liberal cabinet led by K are Willoch tried to 370 introduce an austerity package during the winter 1986.When the 371 opposition in Parliamentrefused to support his measures, he resigned 372 and opened up for anew Labour governmentled by Gro Harlem 373 Brundtland. The main task of the new government would be to try , 374 improving Norway seconomicand fi nancial position. 375 After alarge devaluation,anew policy of fi xed exchangerates was 376 introduced.Asapart of the new regime, Norges Bank had to be allowed 377 to use the interest rate to keep the value of the Norwegian krone at the 378 desired rate. This led arise in interestrates from late 1986. 379 The high interest rates were combined with acontractionary fi scal 380 policy, launched in 1986.The combinedeffect of the monetary and fi scal 381 382 383 384 385 386 387 388 389 390 391 392 393 394 395 Figure 10.2 Current and capital account. Quarterly fi gures. Current 396 prices. Source: Statistics Norway. OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

The Counter-Shock in Norwegian Oil History 211

397 policy was asharp reduction in infl ation from 1987,but also of imports 398 and aggregatedemand. In order to improveproductivity and increase 399 competitiveness, anumberofpolicy changes were made.Subsidies in a 400 number of industries – remains of the policiesfrom the 1970s – were 401 cut.Anumberofthe most important state-owned companies from the 402 postwar era in heavy industries, were closed down, sold or completely 403 restructured. The domestic energy market wasliberalised. This sector 404 had for alongtime been characterised by heavy local and regional 405 regulation in both production and sales. Public institutions remained as 406 dominating owners but domestic regulations on trade were removed, 407 with large effi ciency gains as aresult. By the early 1990s, however, , 408 Norway had one of Europe smostmarket-oriented systems for 409 production and allocation of electricity. Mostimportantly,the previous 410 heavily regulated creditsectorwas completely deregulated and all forms 411 of capital controls were lifted through 1988 and 1989. 27 412 In sum, major elementsofthe postwar system for economic 413 managementwere dismantled through the high number of policy 414 reforms in the late 1980sand early 1990s. Obviously, important elements 415 in this reorientation of policies would have occurred sooner or later. The 416 large oil incomes probably postponed some of the aforementioned 417 reforms; the sharp reduction in national and state income, and the 418 austerity policiesfollowing the counter-shock, clearly enabled the new 419 governmenttoimplement anumber of large structural reforms. 420 421 Government Attitudes to the National and 422 International Companies 423 The oil price collapse of 1986 thus fundamentally changed the 424 perspectives on the national oil industry from creatingexcessive 425 amounts of income to anormal business with normal margins of profi t 426 or,inthe mid-1980s, an industry losingmoney fast. 427

In December1985, some months before the collapse of oil prices in

428

, the winter of 1986,concessions of the so-called Diamon, dBlock were 429 OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

212 Oil Counter-Shock

430 allocated to the oil companies.This was the last of the large, extremely 431 prospectiveblocksfrom the 1970sand early 1980s.Both the lower 432 expectationswith respect to future ﬁ elds and the low price of oil ledto 433 important changes in the rules of the game betweenNorwegian 434 authorities, national and international companies.The state now started 435 giving the international oil companiesconsiderablybetter conditions.28 436 Several foreign companies had indicated that they would limit their 437 involvement on the Norwegian Continental Shelf. At the same time both 438 the Norwegian and the international companiespresented plans for a 439 sharp cut in exploration and research activity in the years ahead. It was 440 decided in 1986 that international companieswould no longer have to

, , 441 carry, Statoil and the state sshare of the exploration costs. Furthermore, 442 in the 11th licensing round in 1987 and the 12th in 1988 foreign 443 companiesweregranted much larger shares than in previous 444 allocations.29 In both rounds thesecompanieswere grantedsharesof 445 over 40 per cent,compared with around 35 per cent on average in the 446 previous two rounds. They were also given the majority of the 447 operatorships in the 12th licensing round. However, in subsequent 448 rounds in the early 1990s, the allocations fell backand were in part 449 smaller than had been the practice in the period 1981– 6.30

450 Theprevious provisionsinthe concessionsystem andthe keyrole

, 451 of Statoil couldalso be viewed as akindof ,infant-industry policy, 452 where anationalindustry is protected in theearlystages. In January 453 1988, in themidst of this dramaticeconomicsituation,Statoil suffered 454 asevere crisisofconfi dence as aresult of huge cost overrunsassociated , 455 with the Mongstad refi nery.The leaderfromthe time of Statoil s 456 founding,ArveJohnsen, resignedand wasreplaced by Harald Norvik. , 457 This leadershipchangealso signi fi ed areorientation in thecompany s 458 role as thenew leaderstressed theneed foramoreef fi cient business 459 strategyand acorporaterestructuring. 31 Theoutcome may be viewed 460 as acombinedresult of thechanged economicclimate associated with a 461 weakened oil priceand theMongstadscandal, whichcausedpolitical 462 uproar. Over time,international oilmarket developments seemed more OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

The Counter-Shock in Norwegian Oil History 213

, 463 effective in shapingthe company sbehaviour than were thepolitical 464 authorities in theearly1980s.But it also should be kept in mindthatthe 465 initialreorganisationmay have altered the politicalsetting suffi ciently 466 to facilitate future changesinthe same direction. Such changescould 467 occurasthe result of consciousactions by politicaldecision makers or 468 they could be part of aprocess of adaptation – slow or rapid – to an , 469 altered political environmentbyNOCs managers.Withthe lowoil 470 priceitbecamenecessarytouse political instruments to make the 471 NorwegianContinentalShelf attractive.Taxes wereeasedinthe 472 late 1980s,the sliding scale was abandoned,and theprovision ensuring 473 thestate (and Statoil)a50 percent share waslifted.The argument was 474 that with these provisions, explorationdeemed valuable to thesociety 475 might notbeprofi table to thecompanies andthuswould notbe 476 affected. By theearly1990s theinfant-industry phase was defi nitely 477 over. Neitherwas there much to protect, since theideaofaresource 478 renttobecollected by societyhad disappearedwiththe oilprice decline 479 of 1986. 480 481 Emerging OPEC Cooperation 482 Ourthird leg, the foreign economic relations with OPEC also changed 483 drastically withthe counter-shock of 1986. As Norway had been tuned 484 in on the radar of the OPEC ministers, it followed naturally that their 485 decisions to change their market strategies, alsoincluded direct 486 references to Norway and the United Kingdom. 487 At theOPECmeeting in Genevaon9December1985, the members 488 agreedtochangetheir market strategyfrom thedefence of ahighoil 489 , pricetothe defence of theOPEC countries market shares. The 490 rhetorical game around this resolutionhad theobjective of drawing 491 attention just as much to the producers outside OPEC as to those 492 within theorganisationwho were failing to keep to theirquotas. Thus, 493 strong complaintsand threats concerningapricewar were expressed:

494 ,OPEC stillharbours thehopethatother producers will cooperate 495 OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

214 Oil Counter-Shock

496 in tryingtomaintain prices by curbing theiroutput. Butimplicitin

497 thecommuniquéissued yesterdayisthe threatofapricewar if they 498 do not., 32 499 The Norwegian governmentsteered asomewhat unsteady course in 500 the domestic political landscape in the spring of 1986,acircumstance 501 that also affected relations with OPEC.Variousstatements suggested 502 that Norway was considering someform of cooperation with OPEC, 503 in order to support the weak marketprice.When the oil pricefell to 504 $10 per barrel in May 1986, the Norwegian economy washit hard. The 505 fall in oil prices createdacurrent-account defi cit of NOK 33 billion in 506 1986. The Norwegian krone was devalued by 12 per cent. The interest 507 rate was raised and a fi xed exchangerate system was established. 508 The governmental expenditure was reduced, and high interest rates 509 contributed to bringing down aggregate demand.33 510 Norway founditselfinaneconomiccrisis; which, forthe fi rst time, 511 illustrated howimportantthe oil sectorhad become forthe Norwegian 512 economy at large.Inthissituation,itseems reasonable to try to deal 513 with thecause of thecrisis, not only theconsequences. In otherwords, 514 anypolitical actionbyNorway that hadareasonablechance of 515 contributingtoanincreaseinoil prices wasregarded as worthwhile 516 trying. 517 The economic crisisalso created achange of government, and in the

518 inauguraladdressbythe newgovernmentled by GroHarlem 519 Brundtland, it was stated that If, the OPEC countries agree on measures 520 capable of stabilizing the oil pricesatareasonablelevel, the Government

521 will contribute to such stabilization, which may in turn ensure future 522 supplies of oil and gas., 34 Out of consideration for opposition at home as 523 well as abroad, the government had to put its OPEC policy into practice 524 with caution.Itwas pointed out that it wasamatter of limitingactual 525 production growth only, not the total produced volume. The Norwegian 526 measureswould be dependent on OPEC itself enforcing measures 527 inclined to stabilise prices. The Norwegian oil minister Arne Øien, met 528 with Yamani in June in Venice. Yamani responded with strong attacks OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

The Counter-Shock in Norwegian Oil History 215

529 on the Norwegian policy since 1984 (see above) and referred allegedly to 530 the consequences of low oilprices for children in Nigeria.35 Øien made it 531 veryclear that pressure would be counterproductive. He representeda 532 minority government, the cooperation with OPEC was contested both at , 533 home and by Norway smain ally, the United States. OPEC would have to 534 praise Norway and be satisfi ed with the limited contribution he could 535 offer. In fact, Norway onlycut planned production, and it hardly affected 536 the activities on the Continental Shelf at all. However,itseems to have 537 been avaluable contribution, as it could have made other countriesmore 538 willing to contribute. Ademarche was received from the United States, 539 but not taken very seriously by the MinistryofOil and Energy.36 540 541 Conclusion 542 We haveidentifi ed three areas of clear effects of the counter-shock of 543 1986: fi rst,reducedpolitical ambitionsinthe regulationofthe 544

Norwegian oil sector, turning the sectorinto amoreliberal (or perhaps

545

, norm, al )economic sector, attractivefor foreign investments and 546 renewed IOC participation in oil exploration and production.Secondly, 547 the counter-shock produced an economic crisisthat infl uenced the 548 macroeconomicpolicy at least for adecade, with highinterest rates and 549 contractionary fi scal policy. Reduced aggregate demandand cuts in state 550 subsidies triggered structural reforms in Norwegian industries and 551 businesses. Finally,the foreign economic relations were opened towards 552 , Norway scolleaguesasoil producing countries. Agood relationship was 553 sustained especially when Norway was among the top oil exporters in the 554 world around the turn of the century. 555 We fi nd the counter-shock to have been rather important for 556 Norwegian (energy) political economy;but not where it might havebeen 557 expected – in the domestic energy consumption, although the changes 558 in economicpoliciesinthe late 1980s and early 1990sfollowing the 559 counter-shock undoubtedly had long-term effects on all aspects of the 560 national energy markets. 561 OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

216 Oil Counter-Shock

562 Notes 563

1. Norwegian Ministry of Oil and Energy, Faktahefte [Fact Sheet] (Oslo, 1987).

564 2. Dag Harald Claes, Globalization, and State Oil Companies: The Case of

565 Statoil, , Journal of Energy and Development xxix/1 (2003), pp. 47– 8.

, 3. Norwegian Ministry of Finance, Report, to Parliament no. 25 (1973– 74) ,15 566 February 1974. English edition available at: http://www.regjeringen.no/ 567 upload/FIN/okonomiavdelingen/Stmeld_25_1973 – 74.pdf (accessed 1March

568 2017). 4. Innstilling, fra den forsterkede industrikomité om undersøkelse etter og

569 utvinning av undersjøiske naturforekomster p ad en norske kontinentalsok- 570 ker m.m., [Recommendation from the special industrial committee on 571 exploration and extraction of subsea natural resources on the Norwegian

Continental Shelf], Innst. S. 294 (1970– 71).

, 572 5. Claes, Globalization, ,p.48. 573 6. Among the International Oil Companies operating on the Norwegian Continental Shelf in the early 1980s we ﬁ nd: Amoco, BP, Conoco, Elf 574 Aquitaine, Exxon, Mobil, Royal Dutch Shell, Phillips Petroleum and Total. 575 7. Raymond Vernon, Sovereignty at Bay (New York, 1971), pp. 46– 58. 576 8. Tore Jørgen Hanisch and Gunnar Nerheim, Fra vantro til overmot? [From disbelief to arrogance?] (Oslo, 1992).

577 , 9. Hermod Skanland, Norge, og oljen [Noway and oil], Sosialøkonomen xvii/11 578 (1988), pp. 4 – 10: 4. 579 10. Johan Olsen, Petroleum og politikk [Petroleum and politics] (Oslo, 1988),

p. 195.

, 580 11. Per Kleppe, Motkonjunkturpolitikken, imidten av 1970-arene [Counter- 581 cyclical policy in the mid 1970s], in T. Moe (ed.), Full sysselsetting og økonomisk vekst. Festskrift til Eivind Erichsen (Oslo, 1987); K are Willoch, 582

Minner og meninger [Memories and opinions] (Oslo, 1988).

583 12. Thorvald Moe, Økende, internasjonal avhengighet og norsk økonomisk 584 stabiliseringspolitikk i1980-arene: noen synspunkter, ,inT.Moe, Full sysselsetting. 585 13. Einar Lie, Økonomisk politikk iNorge etter 1905 [Economic policy in Norway 586 after 1905] (Oslo, 2012), pp. 127– 32. 587 14. Harald Espeli, Industripolitikkpa avveie: motkonjunkturpolitikkenog Norges industriforbunds rolle 1975– 1980 [Industrial policy astray: counter- 588 cyclical policy and Norwegian industrial federal role 1975– 1980] (Oslo,

589 1992).

590 15. Sverre Knutsenand EinarLie, Fi, nancialfragility,growthstrategiesand

bankingfailures , , Business History xviv/2 (2002),pp. 88– 111; Bent Sofus

591 Tranøy, Lo, sing Credit.The Politics of Liberalization andMacroEconomic

592 RegimeChangeinNorway , ,PhD dissertation,UniversityofOslo, 1980;

593 NorwegianParliament, Re, port from theComission forexamining thecauses of theNorwegian BankingCrisis, 1990– 93, ,Parliamentary Doc. 17 (1997 – 8). 594 OCS Chapter10 — 1/2/2018— NANDHINI.P— 571972— IBTauris

The Counter-Shock in Norwegian Oil History 217

595 16. Einar Lie and Christian Venneslan, Over evne: Finansdepartementet 1965– 1992 [Over ability: The Ministry of Finance 1965– 1992] (Oslo, 1992), 596

pp. 353– 8.

, 597 17. Ahmed Zaki Yamani, Oil, Markets: Past, Present, and Future ,paper 598 presented as A.J. Meyer memorial lecture, Harvard University, 3September 1986. 599 18. Financial Times,16October 1984. 600 19. Pierre Terzian, OPEC: The Inside Story (London, 1985). 601 20. Stavanger Aftenblad,20October 1984. 21. Aftenposten,27October 1984.

602 22. As pointed out in Middle East Economic Survey,which printed atranslation,

, ,

603 the article was billed, as having been written by a neutral international oil

, 604 expert,, – but the article clearly refl ects an insider sviewpoint .See Middle East Economic Survey,3December 1984. 605 23. Stavanger Aftenblad,29November 1984. 606 24. Thomas Schelling, The Strategy of Confl ict (Cambridge, MA, 1980), p. 22. 25. Dag Harald Claes, The Politics of Oil-Producer Cooperation (Boulder, 2001), 607 pp. 327– 9. 608 26. All fi gures in 2001 Norwegian kroner.See Norwegian Ministry of Oil and 609 Energy, Fact Sheet 2001, p. 28. Available at https://www.regjeringen.no/en/ dokumenter/Fact-Sheet-2001-Norwegian-Petroleum-Activity-/id419246/ 610 (accessed 1March 2017). Since taxes are calculated several months after , 611 production takes place, the effect of the price fall on the state sincome was

612 somewhat delayed. 27. Lie and Venneslan, Over evne;Lars Mjøset and Adne Cappelen, The,

613 integration of the Norwegian oil economy into the World economy, ,

614 Comparative Social Research 28 (2011), pp. 167– 263.

, 615 28. Einar Lie, The, Norwegian State and the Oil Companies ,inA.Beltran (ed.),

Oil Producing Countries and Oil Companies (Brussels, 2011), pp. 267– 86.

616 29. Helge Ryggvik, Offshore, safety regulations in Norway: from model to system 617 in erosion, , New Solutions x/1– 2(2000), pp. 67– 116: 110.

30. Norwegian Petroleum Directorate, Annual Report (various years).

618

, 31. Norwegian Ministry of Finance, Report, to Parliament, no. 22 (1988– 1989) , 619 p. 41.

620 32. Financial Times,10December 1985.

, 33. Skanland, Norge, og oljen ,p.9. 621 , 34. The government sinaugural speech to the Storting,13May 1986. 622 35. Private communication with the authors by aparticipant at the meeting. 36. Dag Anders Dyrdal, Konsumenter, produsenter eller strategiske argumenter – 623 , USA sinteresser og atferd overfor norsk utenriks oljepolitikk [Consumers, 624 Producers or Strategic Arguments – The US Interest and Behavior towards 625 Norwegian Foreign Oil Policy] (Oslo, 1990). 626 627 OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

1 2 3 4 5 6 11 7 8 9 10 Counter-Shock or After-Shock? 11 NorthSea Oil andEconomics as Politics 12 13 in theUK, 1973–86 14 15 16 Martin Chick 17 18 In the yearsfollowing the sharp riseinthe price of oil in 1973– 4and the 19 steep fall in price in 1986 (Tables 11.1 and 11.2), the United Kingdom 20 developed and sold North Sea oil very rapidly (Tables 11.3and 11.4). 21 This rapid exploitation of UK North Sea oil reserves raised important 22 issues of political economy,ofwhich three in particular are discussed in 23 this chapter. The ﬁ rst concernsthe rate at which North Sea oil reserves 24 were depleted. In addition to economic discussions of depletion rates and 25 expectationsoffuture oil prices, the election of the Conservative 26 governmentwith Margaret Thatcher as Prime Minister made an 27 important difference to the aim and tone of discussions of the rate of oil 28 depletion. The second issue was the impact of the sale of NorthSea oil on 29 UK exchange rate policy.Hereagain the election of the ﬁ rst Thatcher 30 governmentmade adiscernible differencetothe aims and assumptions 31 of exchangerate policy. Finally, the discovery and exploitation of North 32 Sea oilincreased the electoral popularity and economic credibility of the 33 Scottish National Party(SNP) and its aim of achievinganindependent OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

34 Table 11.1 Crude oil spot prices ($/bbl) 35 Dubai Brent Nigerian West Texas 36 $/bbl1 $/bbl2 Forcados $/bbl Intermediate $/bbl3 37 1972 1.90 -- - 38 1973 2.83 -- - 39 1974 10.41 -- - 1975 10.70 -- - 40 1976 11.63 12.80 12.87 12.23 41 1977 12.38 13.92 14.21 14.22 42 1978 13.03 14.02 13.65 14.55 43 1979 29.75 31.61 29.25 25.08 1980 35.69 36.83 36.98 37.96 44 1981 34.32 35.93 36.18 36.08 45 1982 31.80 32.97 33.29 33.65 46 1983 28.78 29.55 29.54 30.03 47 1984 28.06 28.78 28.14 29.39 1985 27.53 27.56 27.75 27.98 48 1986 13.10 14.43 14.46 15.10 49 1987 16.95 18.44 18.39 19.18 50 1988 13.27 14.92 15.00 15.97 51 1989 15.62 18.23 18.30 19.68 1990 20.45 23.73 23.85 25.40 52 1991 16.63 20.00 20.11 21.54 53 1992 17.17 19.32 19.61 20.57 54 1993 14.93 16.97 17.41 18.45 55 1994 14.74 15.82 16.25 17.21 1995 16.10 17.02 17.26 18.42 56 1996 18.52 20.67 21.16 22.16 57 1997 18.23 19.09 19.33 20.61 58 1998 12.21 12.72 12.62 14.39 59 1999 17.25 17.97 18.00 19.31 2000 26.20 28.50 28.42 30.37 60 2001 22.81 24.44 24.23 25.93 61 2002 23.74 25.02 25.04 26.16 62 2003 26.78 28.83 28.66 31.07 63 2004 33.64 38.27 38.13 41.49 2005 49.35 54.52 55.69 56.59 64 2006 61.50 65.14 67.07 66.02 65 2007 68.19 72.39 74.48 72.20 66 OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

220 Oil Counter-Shock

67 Table 11.1 Continued 68 Dubai Brent Nigerian West Texas 69 $/bbl1 $/bbl2 Forcados $/bbl Intermediate $/bbl3 70 2008 94.34 97.26 101.43 100.06 71 2009 61.39 61.67 63.35 61.92 72 2010 78.06 79.50 81.05 79.45 73 2011 106.18 111.26 113.65 95.04 2012 109.08 111.67 114.21 94.13 74 75 Source: BP Statistical Review of World Energy (London, 2013). 1 1972– 85 Arabian Light, 1986– 2012 Dubai dated. 76 2 1976– 83 Forties, 1984– 2012 Brent dated. 77 3 1976– 83 Posted WTI prices, 1984– 2012 Spot (Cushing) prices. 78 79 Scotland. Most of the North Sea oil lay in what would havebecome, on 80 independence, the Continental Shelf of an independent Scotland. While 81 areferendum on devolution wastechnically lost in 1979, the debates 82 associated with the use of North Sea oil and its impact on the choice of 83 currency for an independent Scotland remained extremely pertinent. 84 Such were the shocks associated withthe changing political approaches 85 to the use of North Sea oil between the ﬁ rst OPEC oil price shockof1973

, and the sharp price drop in 1986, that the term counter-s, hock is 87 inappropriate. The UK political economy had already been through a 88 series of major shocks relatedtothe development and use of North Sea 89 oil, such that the events of 1986 might be regarded as an aftershock 90 followingthe precedingmajor disturbances. 91 92 93 Depletion 94 In theoretical terms, decisions on the optimal rate of depletion of 95 exhaustible reserves are strongly inﬂ uenced by expectations of future 96 prices. Accounting for only 5per cent of world oil consumptionin1984, 97 the United Kingdom wasalways an oil price-taker.1 It was recognised 98 that to extract and sell oil as quickly as possible might be to foregohigher 99 income from sufﬁ ciently higher oil prices in the future. In economic OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

100 Table 11.2 Crude oil prices, 1950– 2012 101 Current prices $2012 prices $ 102 1950 1.71 16.30 103 1955 1.93 16.54 104 1960 1.90 14.71 105 1965 1.80 13.08 1970 1.80 10.64 106 1971 2.24 12.68 107 1972 2.48 13.61 108 1973 3.29 17.00 109 1974 11.58 53.94 1975 11.53 49.21 110 1976 12.80 51.63 111 1977 13.92 52.70 112 1978 14.02 49.37 113 1979 31.61 99.97 1980 36.83 102.62 114 1981 35.93 90.75 115 1982 32.97 78.44 116 1983 29.55 68.12 117 1984 28.78 63.60 1985 27.56 58.61 118 1986 14.43 30.23 119 1987 18.44 37.26 120 1988 14.92 28.96 121 1989 18.23 33.75 1990 23.73 41.68 122 1991 20.00 33.72 123 1992 19.32 31.62 124 1993 16.97 26.97 125 1994 15.82 24.50 1995 17.02 25.64 126 1996 20.67 30.24 127 1997 19.09 27.31 128 1998 12.72 17.91 129 1999 17.97 24.76 2000 28.50 37.99 130 2001 25.44 31.69 131 2002 25.02 31.94 132 OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

222 Oil Counter-Shock

133 Table 11.2 Continued 134 Current prices $2012 prices $ 135 2003 28.83 35.97 136 2004 38.27 46.51 137 2005 54.52 64.09 138 2006 65.14 74.19 139 2007 72.39 80.16 2008 97.26 103.71 140 2009 61.67 66.00 141 2010 79.50 83.70 142 2011 111.26 113.56 143 2012 111.67 111.67 144 1950, 1955, 1960, 1965, 1970– 83 Arabian Light posted at Ras Tanura. 145 1984– 2012 Brent dated. Source: BP, Statistical Review of World Energy (London, 2013). 146 147 148 theory, Lynn Gray, Harold Hotelling and Robert Solow had considered 149 such temporal questions variously amongst others.2 While Gray may 150 have been the ﬁ rst to develop atheoretical approachtothe treatmentof 151 exhaustible resources, Solow provided an asset equilibrium interpret- , 152 ation of Hotelling searlier work in which the future value of oil was

, , 153 represented as a royalty, .InSolow sasset equilibrium approach, the rate 154 of return expressed as acapital gain from holding the asset under the sea 155 was compared with the opportunity cost of the depleted oil invested in 156 alternative(and more diversifi ed) assets. Central to both approaches was 157 the comparison of future net earningsdiscounted back to present value 158 with the opportunity cost returns foregone as expressed in the interest/ 159 discount rate used. Even if owners chosetodeplete,speculators could still 160 buy and hold oil if they held asuffi ciently more optimistic view of future 161 price than did the original owners. 3 162 An interdepartmental Working GrouponDepletion Policy, which 163 was established in London in September1975 and chaired by the 164 Department of Energy, studied such issues.4 It included representatives 165 from the Treasury, Foreign Offi ce, Central Policy Preview Staff,the 198 197 196 195 194 193 192 191 190 189 188 187 186 185 184 183 182 181 180 179 178 177 176 175 174 173 172 171 170 169 168 167 166 OCS Chapte

Table 11.3 Oil: indigenous production and reﬁ nery receipts, UK 1972– 801 (thousand tonnes) r1 1 —

1972 1973 1974 1975 1976 1977 1978 1979 1980 1/2/2018 Total indigenous petroleum production2 333 373 410 1,567 12,171 38,265 54,006 77,854 80,468 Crude petroleum: 3 Reﬁ nery receipts total 105,642 114,032 113,478 92,273 98,384 92,260 96,759 98,325 87,457 — NAND Indigenous4 227 235 250 1,156 8,576 21,929 28,609 38,493 39,896 Other5 1,267 1,560 1,810 1,275 692 682 916 606 2,005 Net foreign arrivals6 104,148 112,237 111,418 89,842 89,116 69,649 67,234 59,226 45,556 HINI.P

Source: Central Statistical Ofﬁ ce, Annual Abstract of Statistics 1984 (London, 1984), Table 8.12. 1 The term indigenous is used in this table to include oil from the UK Continental Shelf as well as the small amounts produced on the — 5719 mainland. 2 Crude oil plus condensates and petroleum gases derived at onshore treatment plants. 73

3 Includes process (partly refi ned) oils. — 4 Includes condensate for distillation. IBTauris 5 Mainly recycled products. 6 Foreign trade as recorded by the petroleum industry and may differ from fi gures published in Overseas Trade Statistics. 231 230 229 228 227 226 225 224 223 222 221 220 219 218 217 216 215 214 213 212 211 210 209 208 207 206 205 204 203 202 201 200 199 OCS Chapte r1 Table 11.4 Oil: Indigenous production and refi nery receipts, UK 1981– 90 (thousand tonnes) 1 —

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1/2/2018 Total indigenous petroleum 89,480 103,219 115,045 126,065 127,642 127,053 123,306 114,458 91,811 91,616 production2 3 —

Crude petroleum: NAND Refi nery receipts total 76,616 76,705 76,344 78,450 78,653 79,666 80,363 83,925 88,840 88,402 Indigenous4 37,769 40,294 44,815 45,304 43,231 38,780 38,794 40,582 39,585 36,035 Other5 2,486 3,162 2,366 2,196 1,095 1,006 939 730 904 916 HINI.P Net foreign arrivals6 36,361 33,249 29,163 30,950 34,327 39,880 40,630 42,613 48,351 51,451 — Source: Central Statistical Offi ce, Annual Abstract of Statistics 1992 (London, 1992), Table 8.11. 5719 1 The term indigenous is used in this table to include oil from the UK Continental Shelf as well as the small amounts produced on the mainland. 73 2 Crude oil plus condensates and petroleum gases derived at onshore treatment plants. — IBTauris 3 Includes process (partly refi ned) oils. 4 Includes condensate for distillation. 5 Mainly recycled products. 6 Foreign trade as recorded by the petroleum industry and may differ from fi gures published in Overseas Trade Statistics. OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

North Sea Oil andEconomics as Politics 225

232 Scottish Economic PlanningDepartment and the Department of Energy. 233 Its ﬁ rst report appeared in January 1976. The general expectation was

234 that oil prices would rise well into the future.Asoutlined in the Green

235 PaperonEnergyPolicy (Cmnd. 7101), and the White Paper The, 236 Challenge of North Sea Oil, (Cmnd. 7143), it was envisaged that oil 237 prices could double or eventreble their valueinreal terms by the end of 238 the century.Onthat basis,oil conserved in the 1980s for use in the 1990s 239 and beyond would haveincreased, and probably greatly enhanced,value. 240 Indeed, as wasremarked in the secondreview of depletion policy,the 241 much-vaunted aim of becoming self-suffi cient probably cameatahigh 242 economic cost, abetter strategybeing to import oil at the current world 243 priceand extract the reserves at alater higher price. 5 244 Whileestimates of prices, reserves, andthe peak andtrendof 245 output over future years changedfrom one report of theWorking 246 Grouptothe next, in generalthe case forreducingthe rate of depletion 247 remainedstrong.Variouspossible methods existed forachieving this. 248 Themost directand most immediateinits effects wastoreducecurrent 249 andfutureoutput.However, this required theowners of therigs, who 250 hadbornethe risk of exploration,development andnow production,to 251 be prepared to wait forfuturehigheroil prices. In general, they were not 252 preparedtodothisand indeed,amidstearlyconcernswithundue 253 politicalinterference in theiractivities, they hadobtainedassurances 254 (the so-called Varley Assurances) that production would notbesubject 255 to political whim. Eric Varley was theSecretary of State forEnergyat 256 thetime. TheVarley Assurances werethatwithrespect to new fi eld 257 developments no delays would be imposed on fi ndsmadebefore the 258 endof1975, andiftheywere imposed on later discoveries, there would 259 be full consultation with theindustry so that prematureinvestment was 260 avoided. With respect to production,there wouldbenocutsimposed 261 on fi elds fromdiscoveries alreadymadeorfrom new fi ndsmadebefore 262 theend of 1975, until1982atthe very earliest. Further, no cuts in 263 production wouldbemadefrom any laterdiscovery made underan 264 existing licence until150 percent of thecapital investment in the fi eld OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

226 Oil Counter-Shock

265 hadbeen recovered.Onthe back of theestimates madeinthe third 266 reviewofthe WorkingGrouponDepletionPolicy,consideration was 267 givenastowhether modi fi cationstothe Varley Assurancesshouldbe 268 made.Ultimately, concerns with theeffects on investorconfi dence 269 prevented thishappening. 6 In theshort term,the respecting of the 270 Varley Assurancesmeant that the UK government hadalmost no 271 controloverthe rate of depletion.However, sinceoil fi eldsdiscovered 272 after1975 were not protected by theVarley Assurances, then discussion 273 of future depletion policy remainedvery pertinent. 274 Onelonger-term approach to slowingthe rate of depletion was to 275 have smaller licensing rounds. Givenpredictionsoffalling output from 276 themid– late 1980s,thiswould alsohelptosmooth therateatwhich 277 orders fl owed to theoffshore suppliesindustry and, like aslower 278 depletion rate, potentially ease thetransition to alow-oil economy. 279 It might alsohavebeen possiblefor theBritish NationalOil 280 Corporation(BNOC), established by theUKgovernment in 1976, to 281 have exercised morein fl uence over development andextraction rates

282 haditparticipated in theearly risk stagesofexploration and

, 283 development.7 Instead it was ,carried (i.e. it didnot contribute) in the 284 exploration stage, anddid notoperate on apay-as-you-go basis. This 285 wasthe subjectofsharp disagreement between theDepartment of 286 Energyunder Tony WedgwoodBenn andthe TreasurywithDenis 287 Healey as Chancellor. Forthe Fifth Roundoflicensing in 1976, Benn 288 proposed that participation be at 51 percent in every licence andthat 289 licences be issued onlyafter the conclusionofasatisfactory operating 290 agreement between BNOC and its partners. Benn arguedthatifBNOC 291 contributed in thesameway as itspartners it wouldgivecredence to 292 theclaimthatthe Corporation would actinacommercial manner. Joel 293 Barnett (Treasury)inthe Cabinet meeting of 13 May1976, while 294 regardingitasunfortunate that overseasborrowing by BNOC counted 295 as part of thePublicSector BorrowingRequirement, expressed 296 concern that knowledgeofthe potentially hugeobligationsto 297 contributetodevelopmentcosts wouldcreateseriousproblemsfor OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

North Sea Oil andEconomics as Politics 227

, 298 Britain screditabroad.8 As Barnett wrotetoTonyWedgwoodBenn in 299 September1976: 300 301 Ihaveconsideredthismatter furtherbothwithmyof fi cialsand with 302 Harold Lever, andIam boundtosay that Ifeellittleenthusiasmfor 303 puttingupGovernmentmoney to fi nanceNorth Seadevelopment 304 when thealternative is forthe oilcompanies – some of whom may have abettercreditratingthanHMG on overseas markets – to do it 305 forus.9 306 307 , , In the event the Cabinet did support Benn sproposal, although BNOC s 308 being given 51 per centparticipation, and therefore an increased 309 infl uence overthe rate of depletion, was overshadowedbythe possibility 310 of BNOC being shut down by afuture Conservative government. 311 The future for BNOC looked unpromisingfollowing the election of 312 the Conservative government in May 1979 and, had it not been for the 313 heightened concernwith the security of oil supply followingthe 314 revolution in Iran in 1979, then BNOC mightwell havebeen privatised 315 in that year. 10 As it was, BNOC only had to wait until August 1982 to see 316 its production assets, but not itstrading assets, transferred to anew 317 company called Britoil.11 318 In fact, the election of the fi rst Thatcher government in 1979 marked 319 the start of asignifi cantly changed attitudetowards depletion. While in 320 1977the Department of Energy was discussing how, while respectingthe 321 Varley Assurances, cuts could be made to production,from 1979 into 322 these mainly microeconomic assessments of the socially optimalrate of 323 depletion intruded more political macroeconomicconsiderations.The 324 Chancellor of the Exchequer, Geoffrey Howe, becameconcerned at the 325 effect on tax revenues of any cutsinoil production.The reduction in 326 North Sea oil production estimates for 1981 from 100 million tonnes to 327 91 million with smaller reductionsfor 1982, 1983 and 1984,and the 328 larger one in 1985 from 126 million tonnes to 115 million were in turn 329 , estimated to reduce the government stax take by £0.4 billion in 1981– 2, 330 OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

228 Oil Counter-Shock

331 £0.7 billion in 1982– 3, and£3.5 billion in 1983– 4. ThearrivalofNigel 332 Lawsonatthe Department of Energyadded weight to arguments 333 against anymore activegovernment depletion policy.Essentially 334 Lawsonquestionedthe assumption that oil prices wouldbehigherin 335 thefuture, asimilar view having alsobeen expressed by Alan Walters, 336 theSpecial Advisertothe PrimeMinister. Lawson also wrote anoteto , 337 thePrime Minister arguing that it was no part of theGovernment s 338 philosophy to engageincommodityspeculation,which,hefelt,was 339 entailed by dictatingthatthere should be investment in oilinthe 340 ground.The CentralPolicy Review Staff, agovernment thinktank, 341 expressed itsreservations, butthe PrimeMinister agreed with Lawson. 342 Lawsonwas alsovery mindfulthatcutsof5million tonnes in 1982 and 343 10 million in 1983 would increase the Public SectorBorrowing 344 Requirementby£600million in 1982– 3and £1.7 billion in 1983 – 4. , , 345 Further, any receipts from theprivatisation of BNOC sand BGC soil 346 interests wouldbedepressed andfurther investmentinthe NorthSea , 347 couldbediscouraged.Perhapsmore surprisingly Lawson smemor- 348 andum sawnocaseinthe foreseeable future fordeferringnew fi eld , 349 developments.Thisre fl ectedLawson sviewthatthere hadalreadybeen 350 delaysinbringingprojects forward for otherreasons,and that the 351 imposition of further delayswould damagethe con fi dence of the 352 industry.There hadbeen no fi eld development approvals in 1981 and 353 investor confi dence hadcertainly been shaken by thetax increasesin , 354 that year. Lawson sapproach was not dissimilar fromthatofthe oil 355 companieswho hadbeen arguing for repletion rather than depletion to 356 encourage explorationand development to deal with theproblem of a , 357 sharp declineinproduction fromthe later1980s.Lawson sviews also 358 roughlychimedwiththose of theHouse of CommonsSelect 359 Committee on Energy, whichlaunched alonglastingenquiry into oil 360 depletionpolicy.There were no fewer than 11 oral evidence sessions 361 endinginDecember1981.12 362 The period of tussling withthe microeconomicquestion of the rate of 363 depletion ranfrom 1975 to 1983 andwas eventually subsumed and OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

North Sea Oil andEconomics as Politics 229

364 overridden by these wider political macroeconomicconsiderations. 365 Dif fi cult issues like the premiumplaced on the national security benefi ts 366 of domestic energy supply were not quantifi ed at the margin, andthe 367 view of Alan Walters was that long-term securityofsupply could 368 probably be better enhanced by the holding of adequate stocks of oil 369 rather than by slower depletion. Events proved the Lawson and Walters 370 perspective to be correct, whatever their multiplicity of reasonsfor 371 holding such views.The oil price fell sharply in 1986,and in real terms 372 had not recovered to the levels seen in 1980 and 1981 by 2005.Broadly 373 speaking extra oil in the ground would not have proved agood 374 investment in that period. Similarly, security of supply in the period to 375 the end of the century wasnot an issue. Oil and gas supplies were 376 generally ample. The projectionsofoil (and gas) production from the UK 377 Continental Shelf for the 1990s made in the period of the depletion 378 debate also turnedout to be spectacularly pessimistic,withoil 379 production climbing in the 1990s to anew peak in 1999. If post-2005 380 oil price conditions are also considered the discount rate necessaryto 381 support depletion policy delays in the 1970s andearly 1980s would have 382 been verylow indeed. 383 384 North Sea Oil and Exchange Rate Policy 385 The election of the fi rst Thatcher government also coincided with, if not 386 entirely caused, ashift of emphasis regarding the accommodation of 387 North Sea oil income in exchange rate policy.Inthe wake of the collapse 388 of the Bretton Woods systemof fi xed, if occasionallyadjustable, 389 exchange rates during 1972 and 1973, the United Kingdom had belatedly 390

joined the European-managed exchangerate system, popularly known as

391

, the, snake .UKmembership lasted eight weeks,after which the pound 392 initially ﬂ oated downwards, before receiving some supportfrom OPEC 393 petrodollars being recycled through London.13 It then fell again to the 394 sufﬁ cient alarmofpoliticians that the United Kingdom borrowedfrom 395 the International Monetary Fund (IMF).Inreturnfor IMF loans, the 396 OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

230 Oil Counter-Shock

397 United Kingdom signedlettersofintent in which the United Kingdom 398 agreed to maintain acompetitive exchange rate ﬁ xed in terms of export 399 price competitiveness around its levelinthe fourthquarter of 1976.The 400 concern to maintain the competitiveness of the UK exchangerate was

401 highlighted by the knowledge that the beneﬁ ts of North Sea oil would

402 begin to ﬂ ow.While these were expectedto transform, the balance of 403 payments, ,therewas concern that the impact of North Sea oil could 404 potentially cause damage to the manufacturing sector which remained 405 important for employment and exports.14 As AndrewBritton,Senior 406 Economic Adviser in the Treasury, commented in October 1977: 407 408 The present dilemma facing exchange rate policy is areal one. The 409 market, left to itself, would almost certainly produce an exchange 410 rate over the next twelve months or more which would imply a 411 seriouslossofcompetitiveness. Medium-termprojections moreover suggest that our present targets for the current balance 412 and the growth of real output can only be achieved together if we 413 gain competitiveness. The present strength of sterling thus appears 414 as athreat to our medium-term strategy.15 415

416 Also lurking in the background were fears of the United Kingdom

, 417 contractingacase of the Dut, ch Disease .Following the discovery and 418 extraction of natural gas in Holland, the increase in income beneﬁ ted 419 non-tradable goodsand services (restaurants, hairdressers) whose prices 420 could rise. However, the natural gas boom damagedtradable goods 421 whose priceswere determined on the world market but whose internal

422 costs rose as its domestic labour and other costs rose. Internally,

, 423 resources switched into the boom, sector and exported manufacturing 424 output and employment fell.16 425 There did however exist an alternative view that it was by letting the 426 exchange rate rise that exchange rate policy could best accommodate the 427 effects of the sale of North Sea oil. Prior to the general election in 1979 of 428 the Conservative government, some of the broad lines of this approach 429 were set out by mainly monetarist economists, often in the national OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

North Sea Oil andEconomics as Politics 231

430 Table 11.5 Sterling– US dollar exchangerate, 1975– 86

431 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 432 2.22 1.80 1.75 1.92 2.12 2.33 2.03 1.75 1.52 1.34 1.3 1.47 433 Source: Central Statistical Offi ce, Economic Trends: Annual Supplement, 1996 434 (London, 1995), Table 5:1, p. 223. 435 , 436 newspapers or in stockbrokers papers. The London Business School 437 economists Terry Burns and Alan Budd argued in the Sunday Times in 438 1977 that letting the exchange rate rise would allow interest rates to fall 439 and that it would reduce domestic infl ation, both directly through lower 440 import prices and indirectly through reduced wage settlements. The 441 consequent fall in nominal interest rates would help investment and 442 stimulate consumption, as lower infl ation reduced the need to force 443 consumers to save in order to maintain the real value of their fi nancial 444 balances.17 445 Themovements in thenominal US$:£ exchangerateare shown in 446 Table 11.5. The fl uctuations in theexchangeratefrom $1.75 in 1977 to 447 $2.33 by 1980, andthenfrom $2.33 in 1980to$1.3 by 1985were 448 considerable. Expressed as arealexchangerate, the relativeunitcosts, 449 often considered to be thebestmeasure of therealexchange rate, rose 450 by over 55 percent from1977 to 1981, an unparalleledincrease. The oil 451 pricehikeof1979 – 81, adomesticmonetary squeeze andareduction 452 in offi cial action to reducethe exchangeraterise, allowedthe exchange 453 rate to rise. Together with thespendingeffect of NorthSea oil, 454 therewas an increasingshift from manufacturing to services. , 455 Manufacturing sshare of GDPfell from31.7per cent of GDPin 456 1973 to 24.2 percent in 1988. Therateoffallfrom 29.3 percent in 457 1978 to 25.0 percentin1981,afall of morethan4percent in three 458 years, 18 was particularly striking.Inaddition to manufacturing export 459 industries, sometradedgoodsservicesectors alsowent into what 460 proved to be irreversible decline. Tourism,which hadpreviously been a 461 largenet earner of foreignexchangefor theUnited Kingdom, swung 462 into defi citfor most of the1980s.The contributionofUKexchange rate OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

232 Oil Counter-Shock

463 policy to thehastening of deindustrialisationwas signi fi cant, andwhile 464 monetary policy was important in raising theexchangerate, so toowas 465 themanagement of theincomefromthe sale of North Seaoil.Withthe 466 electionofthe Thatchergovernment, apolicy of seeking to manage the 467 exchange rate so as to maintain thecompetitiveness of UK exports, 468 gave way to one whichemphasised thecontribution whichahigher 469 exchange rate could make to reducing infl ation.The earlyyears of the 470 fi rst Thatcher government were extremely contentiousintermsof 471 economicpolicy-making, andbothondepletionand exchange rate 472 policy decisionsconcerning theuse of NorthSea oil refl ect distinctive 473 andnew approach to economicpolicy.Thisnew policy attracted strong 474 criticism in Scotland and laidthe basisfor thesubsequent collapseof 475 Conservativeparliamentary representation in Scotland andincreasing 476 demands forindependence. 477 478 Table 11.6 North Sea oil tax revenueas%ofGDP 479 1973– 40.0 480 1974– 50.0 481 1975– 60.0 482 1976– 70.1 1977– 80.2 483 1978– 90.3 484 1979– 80 1.1 485 1980– 11.5 486 1981– 22.5 1982– 32.7 487 1983– 42.8 488 1984– 53.6 489 1985– 63.1 490 1986– 71.2 1987– 81.0 491 1988– 90.7 492 1989– 90 0.4 493 1990– 10.4 494 1991– 20.2 495 Source: Institute for Fiscal Studies. OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

North Sea Oil andEconomics as Politics 233

496 Scotland 497 The discovery of North Sea oil gave aboosttothe political fortunes of the 498 SNP. The SNP registered 21.9per cent of the vote in the February 1974 499 general election when seven MPs were elected, and increasedthis to 30.4 500 per cent of the vote with the election of 11 MPs in the October 1974 501 election. On 3March1979 therewas aScottish Referendum on 502

Devolution, which wasavote for or againstdevolution and the

503

, establishmentofaScottish Assembly. The Yes, vote won the referendum 504 narrowlyby51.6 per cent to 48.4 per cent but to no avail as an 505

amendmenttothe 1978 Scotland Bill by abackbench Labour MP

506

, required that the Yes vote be 40 per cent of all registered voters. The Yes, 507 vote was 32.8 per cent of registered voters.On18September 2014, a 508 referendum washeld on the question of Scottish independence. This 509 timetherewas no requirementastowhat share of the total registered 510 electorate should vote,one way or the other. The turnout was 84.6 per 511 centofthe total electorate.Ofthose voters,44.65 per cent voted in favour 512 of independence, 55.25 per cent votedagainst with 0.1 per cent of voting 513 papers being rejected. 514 As an independentsovereign state, the government of Scotland 515 would be able to tax the exploitation of the oil reservesofits Continental 516 Shelf. In the 1970s, whatever the disputesabout median lines, it was 517 , obvious that most of the UK sNorth Sea oil ﬁ elds lay in an independent 518 , Scotland sContinental Shelf, and agovernmentofanindependent 519 Scotland would very likely have sought to slow depletion, evenifonly to 520 ease pressure on what may have been its independentexchange rate.19 521 On the basis of the contribution of oil taxes to UK GDP(see Table 11.6), 522 overthis same period had all of that taxrevenue gone to an independent 523 Scotland, then the GDP of Scotland would have increased by about 524 one-third in the mid-1980s. This was avery considerable increase in 525 , Scotland sGDP, as was recognised by the Scottish Ofﬁ ce economist, 526 Gavin McCrone,early on in discussions about the possible shape of a 527 devolved settlementfor Scotland. In an internal paper circulated on 528 OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

234 Oil Counter-Shock

529 5April 1974,McCrone thoughtthatNorth Seaoil co, mpletely overturned 530 thetraditional economic case againstScottishnationalism, since: 531 532 Scotland could now expect to have massive surpluses both on its 533 budget and on its balance of payments and with the proper 534 husbanding of resources this situation could last for avery long time into the future [ ... ]Thus, for the ﬁ rst time since the Act of 535 , Union was passed, it can now be credibly argued that Scotland s 536 economic advantage lies in its repeal.20 537 538

At that time, the expectation wasthat an independent Scotland would

539

, have its own currency. Again, fear of the Dutch, Disease reared its head. 540 Unless an independent Scottish exchange rate was carefully managed, 541 an increase in GDP might also be accompaniedbyaccelerated

542 deindustrialisation. McCrone thought an exchangerate of £1, Scots to

543

120p sterling withintwo years of independence[... ]quite probable,

544

, , necessitating strategies to avoid the Dutc, hDisease suchas extensive 545 lending abroad, whether to England, the EEC or under-developed

546

countries , . 21 Consideration would alsoneed to be given to adepletion

547

, , policy22 which wasmore app, ropriate and which could be verydifferent 548 from that now being demanded by the UK [since] quite apart from the 549 need to avoid piling up excessive surpluses, Scotlandwould wish to 550 extend her North Sea oil revenueover amuchlonger period than the 30

551 or so years which seems likely at present planned rates of extraction, . 23 552 Concerns that if Scotland gainedindependence then England might

553 impose an, import surcharge, aquantitative control or even atariff on

554 goods coming from Scotland, were allayed by the recentaccession of the 555 United Kingdom to the EEC in 1973. Membership of the EEC would 556 require both Englandand Scotlandtorespect EEC rules.Inthe wake of 557 the ﬁ nancial disaster of the Darien Scheme in the late 1690s and to 558 remove tariffs betweenEngland andScotland,representatives of 559 Scotland had agreed to the Act of Union in 1707.Were England to 560 leave the EEC then it was expected in the 1970sthat Scottish access to the 561 OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

North Sea Oil andEconomics as Politics 235

562 other countries could, in time largely compensate for any restrictions 563 that might arise on English trade, . 24 564 In the twenty-ﬁ rst century,aﬁ nancial crisiswith an unwanted 565 starring role for Scottish banks, the Halifax BankofScotlandand notably 566 the Royal Bank of Scotland, formed part of the background to the 2014

567 referendum on independence. Perhapsscarredbythe 1970sdiscussionof

, 568 the potential Dutc, hDisease effects of an independent currency, in 2014 569 the SNP campaigned on the basis of continuingtouse the pound sterling 570 as the currency of an independentScotlandaspart of aformal monetary 571 union with the rest of the United Kingdom.Whether amonetary union 572 would have been negotiated after aYes vote will not now be known.Yet, 573 as Mervyn King, whowas governor of the BankofEnglandatthe time of

574 referendum, subsequently pointed out after resigning as governor, the

, 575 sterling, isation option, whereby Scotlandsimply continued to use 576 sterling, was perfectly viable.25 It might not sit well with SNP notions of

577 being independent, but it was apracticable option. With the United

, 578 Kingdom as awhole, but not Scotland itself, voting for Bre, xit ,then the 579 currency question becamepotentially morecomplicated. If, in another 580 referendum, Scotland wastovote for independence, it would then seek 581 membership of the European Union. It might be expectedtojoin the 582 Euro, but given the fact that two-thirds of its trade is with England, this 583 would clearly fall foul of the criteria for an optimalcurrency area.26 584 585 Conclusion 586 , Evenwithout considering the miners strike of 1974and 1984– 5, or the 587 privatisation of the nationalisedgas and electricity industries in the 588 1980s, the political heat surrounding the UK fuel and power industries 589 in the 1970s and 1980s is striking. The arguments over the depletion, 590 ownership and macroeconomic accommodation of North Sea oil are a 591 further striking example of this. The arguments revealfundamental 592 differences of view betweeneconomists in the Treasury in the mid-1970s 593 andthe ministers and advisers whose viewscametodominate 594 OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

236 Oil Counter-Shock

595 discussions followingthe election of the ﬁ rst Thatcher government. 596 These differences concerned not just the role of free market mechanisms 597 in depletion and exchangerate policy and the extent to which they 598 should be modiﬁ ed by government intervention, but also the question of 599 the effects of such policies on differentparts of the United Kingdom.The 600 effects of deindustrialisation were felt particularly strongly in Scotland 601 and, in as much as it was the exchangerate policy of the Thatcher 602 governmentthat contributed to this, then so too wasthe government 603 seen as applying policies which were contrary to the economicinterests 604 of Scotland. That suchpolicies arose in part from the exploitation of oil , 605 in what would havebeen an independentScotland sContinental Shelf 606 simply rubbedsaltinto Scottish wounds. Given the arguments over 607 depletion, exchangeratepolicy and the constitutional future of the 608 United Kingdom,all of which arose from the exploitation of North Sea 609 oil, then the fall in the price of oil was but an aftershock following more 610 than ten years of tectonic movement at the centre of the political 611 economy of the United Kingdom. 612 613 Notes 614 1. Thomas Weyman-Jones, The Economics of Energy Policy (Aldershot, 1986),

615 p. 184.

616 2. Robert Solow, The, economics of resources, and the resources of economics , American Economic Review lxiv/2 (1974), pp. 1 – 14; Lynn Gray, Rent, under

617

the assumptions of exhaustibility, , Quarterly Journal of Economics xxviii/3

618 (1914), pp. 466– 89; Harold Hotelling, The, economics of exhaustible 619 resources, , Journal of Political Economy xxxix/2 (1931), pp. 135– 75.

3. TheNationalArchives, Kew, London (henceforthTNA), T381/70, A. Bottrill,

620 , Ec, onomic AspectsofNorth SeaOil ,1978, paras. 10– 13. 621 4. Alex Kemp, TheOf ﬁ cial HistoryofNorth SeaOil andGas,Vol.1, TheGrowing 622 Dominanceofthe State (Abingdon, 2012), p. 535.

5. TNA, POWE 63/1586, Department of Energy, Working Group on Depletion

, 623 Policy, Third Review of depletion policy, Depletion, Policy ,12October 624 1978, p. 20, para 27.

625 6. Kemp, Ofﬁ cial History,Vol. 1, pp. 351 and 545.

, 7. Martin Chick, Property, rights, economic rents, BNOC and North Sea oil ,in 626 F. Amatori, R. Millward and P. Toninelli (eds), Reappraising State-Owned 627 Enterprise: AComparison of the UK and Italy (Abingdon, 2011), pp. 145– 63. OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

North Sea Oil andEconomics as Politics 237

628 8. Kemp, Ofﬁ cial History,Vol. 1, pp. 450 and 542– 3. 9. TNA, POWE 63/1528, Joel Barnett, Treasury, to Anthony Wedgwood 629 Benn, letter, Fifth Licensing Round: BNOC contribution to costs, Secretary 630 of State, Department of Energy, from 13 September 1976. Harold Lever was 631 Chancellor of the Duchy of Lancaster, in effect agovernment minister without portfolio who was appointed as an economic advisor to the Labour 632 government.

633 10. Kemp, Ofﬁ cial History,Vol. 1, pp. 542– 3.

, 634 11. Chick, Property, rights in Amatori, Millward and Toninelli, Reappraising, pp. 159– 60.

635 12. Kemp, Ofﬁ cial History,Vol. 1, pp. 551, 557 and 559– 60.

, 636 13. James Foreman-Peck, Trade, and the balance of payments ,inN.Crafts and

637 N. Woodward (eds), British Economy since 1945 (Oxford, 1991), p. 169.

14. TNA, T382/20, M.E. Hedley-Miller, paper, Management, of the exchange

638 rate, ,11January 1977, paras. 1, 3and 5.

639 15. TNA, T382/25, A.J.C. Britton, paper, The, exchange rate and economic

strategy, ,18October 1977, para. 1.

640

, 16. Charles Bean, Sterling, misalignment and British Trade performance ,inR.C. 641 Marston (ed.), Misalignment of Exchange Rates: Effects on Trade and

642 Industry (Chicago, 1998), pp. 39– 69: 45.

, 17. TNA, 378/56, Peter Middleton, paper, Exchange, Rate Policy ,6May 1977,

643

para. 8f. TNA T378/56, A.J.C. Britton to Sir Bryan Hopkin, note, 1977:, How

644 to survive it, ,20January 1977, paras. 1 – 3; TNA, T381/70, A. Bottrill, paper,

, 645 Economic, aspects of North Sea oil ,1978, para. 17. 18. Roger Backhouse, AppliedUKMacroeconomics (Oxford,1991),pp. 191

646 and249.

647 19. TNA, T319/2828, Kilbrandon, Report: Possible devolution of functions 648 involving offshore oil, ,memorandum by the Department of Energy,

12 February 1974, para. 2.

649 20. TNA, CAB 198/100, Gavin McCrone, The, Economics of Nationalism

650 Re-Examined, ,paper circulated on 5April 1974.

, 21. TNA, CAB 198/100, McCrone, Economics, of Nationalism .

651

22. TNA, T319/2828, Department of Energy, Kilbrandon, Report: Possible

652 devolution of functions involving offshore oil, ,12February 1974, para. 2.

, 653 23. TNA, CAB 198/100, McCrone, Economics, of Nationalism . 24. Ibid. 654 25. Mervyn King, The End of Alchemy: Money, Banking and the Future of the

655 Global Economy (London, 2016), p. 244.

, 656 26. Robert A. Mundell, At, heory of optimum currency areas , American Economic Review li/4 (1961), pp. 657– 65; Mario I. Blejer, Jacob A. Frenkel, 657 Leonardo Leiderman, Assaf Razion with David M. Cheney, Optimum 658 Currency Areas: New Analytical and Policy Developments (Washington, DC, 659 1997), p. 8; Peter Kenen, Economic and Monetary Union in Europe: Moving Beyond Maastricht (Cambridge, UK, 1995), p. 81. 660 OCS Chapter11 — 1/2/2018— NANDHINI.P— 571973— IBTauris

661 662 663 664 665 666 667 668 669 670 671 672 673 674 675 676 677 678 679 680 681 682 683 684 685 686 687 688 689 690 691 692 693 OCS Part_4— 1/2/2018— NANDHINI.P— 571974— IBTauris

1 2 3 4 5 6 PART IV 7 8 THECONSUMERS 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 OCS Part_4— 1/2/2018— NANDHINI.P— 571974— IBTauris

34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

1 2 3 4 5 6 12 7 8 9 10 Reducing Dependence on OPEC Oil: , 11 TheIEA sEnergyStrategybetween 12 13 1976 andthe Mid-1980s 14 15 16 Henning Tü rk 17 18 Introduction 19 When on 9July 1985 the governingboardofthe International Energy 20 Agency (IEA) metatministerial level in Paris to discuss the situation of 21 the energy and especially the oil market, the atmosphereofthe meeting 22 wasrelaxed. The ministers could bring in the harvest of the last 11 years 23 work. They declared that the oil marketwas currently characterised by

24 weak, demand, considerable over-capacity [ ... ]and downwardpressure

25 on prices , 1 .Inthe eyes of the ministers this was partly due to the 26 structural change of the energy sector in the IEA member states. In the 27 previous years the IEA members had reduced the amount of energy 28 needed for each unit of the GDP, and the share of oil in the fuel mix was 29 reduced from 53 per cent in 1973to42per cent. According to the 30 ministers, one reason for this change were the two oil crises of the 1970s 31 with their sharp price increases and another reason was government 32 policy.With regard to the last point,the ministers stressedinthe ﬁ nal 33 OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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34 communiqué the, crucial importance of international energy co- 35 operation withinthe IEA in achieving these results , . 2 36 That the ministers would pat themselves on the back could be 37 expectedbut even the former Venezuelan OPEC secretary-general

38 FranciscoParra attested the IEA countriesinhis book about oil politics

, 39 spectacu, lar results 3 in restructuring the energy sector between 1973 and 40 1985. So in my chapter Iwill focus on the role the IEA played for the 41 energy policy of its memberstates in this period. Is it possible to identity , , 42 connections betweenthe IEA swork and the members energy policy? , 43 Can we detect shiftsinthe IEA sapproach to energy policy between the 44 1970s that were characterised by asharp oil price increase and the 1980s 45 with their relaxedoil market and low prices? To answer thesequestions I 46 will ﬁ rstly concentrate on the guidelinesand instruments the IEA , 47 developed for inﬂ uencing its member states energy policy.Subsequently, 48 the development of the West German energy programme between 1973 , 49 and 1981 will be shortly analysed with aview to the IEA sstrong

50 emphasis on energy conservation. Finally,Iwill discuss the evaluation of

, 51 the counter-sh, ock by the IEA and the conclusions it drew from the 52 situation of the oil market in the midst of the 1980s. 53 54 The Founding of the IEA and the Development 55 of its Long-Term Co-Operation Program (LTCP), 56 1974–6 57 TheInternational Energy Agency (IEA)was foundedinNovember1974 58 afterthe ﬁ rstoil crisis.Inthisautonomoussub-organisationofthe OECD 59 in Paris, theWestern industrialised countries (exceptFrance) gathered to 60 coordinate theirenergypolitical approaches.Inthe variousbodiesofthe 61 organisation thememberstatesof ﬁ cialsdiscussed theirviews with energy 62 expertsand representativesofthe IEAsecretariat therebydevelopinga 63 common view on theenergyproblemsofthe time andthe possibilitiesto 64 resolvethese problems.Its main decision-makingbodywas andstill is 65 thegoverning boardwhere therepresentativesofthe member countries 66 OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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67 decidedonvarious energy topics andthe future developmentofthe IEA. 68 In thefoundingprocess in 1974 theUnitedStateswas able to push through 69 asystemofweighingvotes accordingtooil consumptiononmostofthe 70 topics,aruling that wasclearly in favour of theUnitedStatesasthe largest 71 oilconsumerofthe IEAcountries.Asasort of compensation,the voting 72 system also made sure that neitherthe United States norWestern Europe 73 as abloccould push throughdecisions alone.4 74 Themembers expected the IEAtobeeffective in different time

75 spans. In theshort run, it should prevent the potential future useofthe

, 76 ,oilweapon with thehelpofacrisismechanismthatwas elaborated in 77 detail in theInternational EnergyProgram (IEP).Inthe long run, it 78 should help to reduce dependency on oil, especially fromthe Middle 79 East.For this task theIEP only provided the frameworkwithsome 80 generalremarksabout itsaims. 5 It was therefore crucialinthe initial , 81 period of theIEA to ﬁ ll this part of theIEA sworkwithaconcrete 82 programme. As thewhole IEAprojectdepended from thebeginning 83 on US leadership, it wasnosurprisethatthe US governmenttook the 84 initiative by proposing aLong-Term Co-OperationProgram (LTCP) , 85 in the ﬁ rst session of theIEA sgoverning board in November1974.6 86 TheAssistant Secretary of State Thomas Enders pleadedinhis 87 speech for commonprinciples guidingthe effortofthe IEAcountries 88 to reducethe dependency on oil fromthe Middle East. He called 89 especially forenergyconservation and thedevelopmentofnew oil , 90 supplies. He also supported setting targetsfor themembers energy , 91 conservation efforts andreviewing thecountries actionstoreduce 92 energydependence everyyear. With itspeer reviewproposalthe 93 United States picked up asoft-powertoolthatwas alreadypractised in 94 some OECD Committees.7 In theIEA it wastoserve as ameans of , 95 coordinating themembers energy policy. 8 In thefollowing months theUS 96 demandsweremainlydiscussed in oneofthe so-calledStandingGroupsof 97 theIEA – theStandingGroup on Long-TermCooperation (SLT). Here 98 thegovernmentrepresentatives andthe staffofthe secretariatmet to 99 developacoherent programme. TheDeputyAssistant Secretary of State, OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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100 Steven Bosworth,becamethe chairman of theSLT andthusheldakey 101 position forthe furthernegotiations.9 102 During the discussions the US government introduced anew element 103 that proved to be aserious stumblingblock for the negotiations. The US 104 representatives pushed for asystemthat would protectlarge investments 105 in the development of new technologies or the exploitation of energy 106 sources like tar sand. By this, the US governmentwanted to preventa 107 dumping strategyofOPEC that could squeeze the new competitorsout 108 of the marketbymaking oil considerably cheaper. The proposed system 109 rested on two pillars. One pillar was a fl oor price for the import of crude 110 oil and the secondacommon fund for energy investments of the IEA 111 members. The US position was supported by other oil producers like 112 Great Britain10 but was fi rmly opposed by large oil consuming countries 113 like Japan, Italy and West Germany.11 They feared that they would 114 secure US or British investments without receivinganything in return. 115 Despite this basic clash of interests,the US government pressed for 116 speedy negotiations because it wanted to adoptastrong programme of 117 the industrialised countries before the start of the preparatorymeeting 118 of the Conference on International Economic Cooperation (CIEC). 119 In this conference the industrialised oil consuming countries discussed 120 the situation of the oil market with the oil producing developing 121 countries. The US strategyobviously wastostrengthen the positionof 122 the industrialised countries in these negotiations by an ambitious IEA 123 programme of reducing dependence on Middle Eastern oil.12 124 During the negotiations in the IEA the US governmentturned out to 125 be fl exible. It dropped the idea of acommon fund, which washeavily 126 opposed by West Germany, but insisted on ahigh fl oor priceof$8 – 9. 127 In the governing board meeting in March1975, the member states 128 accepted the introductionofafl oor price in principle, but without fi xing 129 its level. It was planned to determine the details of the programmeinthe 130 governing boardmeeting in July.Inthis meeting the confl ict between the 131 oil producing and oil consuming countries in the IEA culminated. There 132 were still different assumptions about the level of the fl oorprice. OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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133 Additionally,the United Stateswanted to lay down the procedure on 134 how to protect the fl oorprice in the programme whereas West Germany 135 and other Europeancountries argued for a fl exible solution that would 136 leavethe freedom of decision to the memberstates.Italy, Sweden and 137 other countriescriticised the imbalance in the programme that would be 138 mostly advantageous for the countries that were also large oil producers. 139 Besides, some other countries feared that the adoption of the LTCP 140 would provoke the OPEC countries and thus strain the beginning of the 141 CIEC talks. As the US congress also articulatedscepticism against the 142 instrumentofafl oorprice the US negotiators fi nally acceptedto 143 postpone the decisions until the end of 1975. In the meantime, the SLT 144 should further study the potential effects of the fl oor priceand work out a 145 more balanced programme. 13 146 Finally,inthe governing board meeting of 19 December 1975 the 147 member states acceptedthe new version of the Long-Term Co-Operation 148 Program that wasof fi cially adopted on 29 January 1976. The now so- 149 called minimumsafeguard price (MSP) was fi xed at $7 as acompromise 150 between the highexpectationsofthe US and UK governments and the 151 demands of West GermanyorJapan.14 Additionally, to receive a 152 balanced programme that would alsogive some advantages to the non- 153 producing countries of the IEA the LTCP included adeclaration of intent 154 about the facilitation of cooperation on the development of alternative 155 energy sources. The member countries alsodeclared they would put the

156 nationals from other IEA countries on equal footing with the natives

157 with regard to energy, investment, the purchase and sale of energy and 158 the enforcement of rulesofcompetition, . 15 With aview to the interests of 159 the non-producing countries, the chairmanofthe governingboard 160 declared that the chapters about the MSP, the closer cooperation and the

161 reduction of discriminatory measures against nationals of other IEA

162 countries were strongly interconnectedtosecure an, overall balance of 163 burdens and beneﬁ ts, . 16 In the following years neither the MSP nor the 164 cooperation declaration played asigniﬁ cant role.17 The MSP was never 165 useddue to the high oil prices. Even in the midst of the 1980s, when there OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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166 was alarge excess of crude oil on the market, the price never fell below 167 the $7 limit. 168 So, the energy conservation aspectofthe LTCP proved to be more , 169 important than the MSP. Rightfrom the beginning of the IEA swork, the 170 US governmentadvocated strong energy conservation effortsfrom the 171 memberstates. In line withthis, the IEA members were to reduce their 172 oil consumptionby2mb/d at the end of 1975.Most of the other 173 governmentsopposedstrongconservationgoals becausetheyfeared 174 causingareductionineconomicgrowthand ahigherunemployment 175 rate. 18 Obviously, it wasdifﬁ cult to discusssuchaproposal in the 176 atmosphere of economic declinein1975. Butthe member statesaccepteda , 177 review of theirconservationpolicybythe IEA sStandingGroup on Long- , 178 Term Cooperation. Theinternalreviewofthe member states conservation 179 effortsstarted as earlyas1975and wasbased on aquestionnaire the 180 member states hadtodeliver to theIEA.Since thesecondreviewin1976 , 181 thecomparisonofthe member states conservation policy wasalso 182 publishedbythe IEA. In themeantimeenergy conservation was 183 introduced as an importantpartofthe Long-TermCo-OperationProgram , 184 andcontrolledbythe IEA ssub-group on energy conservation.Inthe

185 programmethe member states also accepted grouptargets forenergy

186 conservation and at, horoughand systematic assessment of evolving 187 national programmes andpoliciesonthe basisofcommoncriteria , . 19 188 In these published reviews the IEA pushed its memberstates to 189 strong efforts in energy conservation. The Agency recommended for 190 example speed limits on highways, stronger subsidies for public 191 transportetc. With the help of the reviews the IEA also spread its energy 192 political approachthat an undistorted market price of oil would be very 193 important to induce energy conservation. It would force industry and 194 privatehouseholdstoreduceenergyconsumption substantially. 195 Therefore it admonished countries that artiﬁ cially held the price down. 196 Especially theUnitedStateswas in thefocus of thereviews.Acharacteristic

197 exampleisthe 1976 report that recommendedthe followingtothe US 198 government: [P, ]rices andtaxes must rise soon to reﬂ ectatthe very least, OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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199 therealvalue of theenergy(as they have in othercountries)iflong-term 200 conservation is to be takenseriously by industry andconsumers., 20 201 202 The Group Target and the Common Principles on 203 Energy Policy 204 Shortly after the establishmentofthe LTCP, the US government tableda 205 new proposal, this time aiming at amoreambitious group target for the 206 oil consumption of the IEA as awhole. The group target should also be 207 broken down to national quotas. The group and national targets should 208 be reached by concrete measures of the members. The rationale behind

209 this proposal wastomaintain the impression of the IEA as an action-,

210 oriented organization, . 21 But the most important aspect of such a 211 commitmentonthe international level would be to help the US

212 administration in, persuading areluctant Congress to adoptastrong and

213 effective US domestic energy policy, . 22 214 Most of the other countries opposed country quotas.23 The West 215 German government for example feared an embarrassing haggling 216 among the memberstates that would be counterproductive to consumer 217 solidarity. Additionally, the economics ministry underscored that it 218 would be difﬁ cult to forecast individual consumption targets. In linewith 219 its economicpolicy approach, neither was West Germany willing to 220 interfere in the oil market to obtain certain IEA goals. The West German 221 governmenttherefore argued for adecision only about agroup objective 222 and acatalogue of possible measures to reach it. 223 The US activity resulted, after more than one year of negotiations, in 224 the Group Objectivesand the Principles for Energy Policy the IEA 225 adopted in October 1977. 24 The starting basis of the document was a 226 predicted severity of the situation on the oil marketinthe midst of the 227 1980s. The IEA predictedthat oil imports of IEA countries from OPEC 228 would rise from 23 mb/d in 1976 to 33 mb/d in 1985. Furthermore, the 229 non-IEA members would consume aminimum of 10 mb/d. As the IEA 230 expected this general demandtobeconsiderablyhigher than OPEC 231 OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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232 production, it called for astrong reduction in energy consumption by the 233 IEA countries. The group objective now determined oil imports of 234 26 mb/d in 1985 to avoid strong pressure on the market. To reach this 235 aim, the ministers urged stronger conservation efforts, an increase in the 236 use of coaland an expansioninthe use of nuclear power. 25 Additionally, 237 the ministers committed themselves to astrengthening of energy policies 238 in their home countries on the basis of the adopted principles. The vision 239 of these principles wasanational energy policy that was based on a

240 coherent energy programme.The main pillar was the price for energy

241 that should reach, alevel which encourages energy conservation and 242 development of alternativesources of energy, . 26 The memberswere to 243 promote the use of coal andatomic energy instead of oil and call for 244 energy conservation with the help of pricing policy (like taxes)orthe

245 setting of energy efﬁ ciency standards. Additionally,the member states

246 were to establish an inves, tment climate which encourages the fl ow of 247 public and private capital to develop energy resources, . 27 The group 248 objectivesand the principles on energy policy were the basis for an 249 intensifi ed peerreview process that should be conductedevery year by 250 the SLT. The basis document for the review was to be delivered by the 251 secretariat and discussed in plenary session.28 In acertain cycle, some 252 countrieswere to be reviewed in depth, with ateam visiting the country 253 and discussing the development of national energy policies with 254 politicians, government offi cials and representatives of energy compa-

255 nies. In the Principles on Energy Policy the member countries pledged to

. ..

256 strength, en their policies[ ], taking into account the results of the 257 reviews, . 29 Besides the permanent pressure of the IEA on its member 258 states to implementenergy conservation measures, the second oil crisis 259 underscored how important it was to reduceoil consumption. 260 261 The Impetus of the Second Oil Crisis 262 The second oil crisis of 1978– 9was caused by the drop out of Iran as the 263 second largest oil exporter from the oil market due to aviolent regime 264 OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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265 change from the Shah to AyatollahKhomeini in January/February 1979. 266 This development caused panic in the oil market, with the result that 267 manyoil companiesbought their oil on the narrow market for short- 268 term contracts, the so-called spot market. The price for crude oil 269 exploded, and the OPEC countries adapted their price policy to the spot 270 market developments.30 271 This event seemed to conﬁ rm the gloomypredictions of the IEA 272 about the future of the oil market, although it came earlier than expected 273 and wascaused by political turmoil. As the shortfall did not reach the , 274 trigger for the activation of the IEA semergencymechanism, other 275 possibilities to cope with the crisiswere evaluated by the secretariat and

276 themembercountries.Inits meetingon2March1979, thegoverning

, 277 boardadopted the Ac, tion on theOil Market Situation . 31 Thecentrepiece 278 of this resolution wasalegally non-bindingcommitmentofthe member 279 states to reduce theiroil consumptionby5percent.The waytoachieve 280 this reductionwas left to thememberstates. In thefollowing months this 281 decision proved to be ineffectivesothatthe governingboard metagain in 282 May1979, this time on theministerial level, to reconsider themeasures. 283 Themeeting con ﬁ rmed thedecisions of March, butnow implementeda 284 monitoring processofthe activities of thememberstatestoreach the 285 reductioninoil consumption.32 Thegoverning boardalsonoted that some 286 governmentswishedmandatory measures to be implemented. This 287 proposal wasmainlyput forwardbythe United States,where President 288 JimmyCarterneededbacking forhis domesticenergypolicyplans against 289 theoppositionalCongress. In addition,the United States wanted to send a 290 strong signal to OPEC countriestobereluctant in theirprice decisions. 291 Butthe majority of theIEA membersinsistedonvoluntary measures. 292 Especially thegovernments of liberalmarket-oriented economieslike 293 West Germanyopposedthe US plans.33 294 During and after the second oil crisisthe IEA tried to reinforcethe , 295 change of its member countries energy mix at the expense of oil 296 consumption. In May 1980 the IEA introduced so-called yardsticks that , 297 were based on atarget for every country soil import.34 The secretariat OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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298 was allowed to review regularly the single country sperformance against

299 the yardsticks. Additionally the IEA adopted the Ministe, rial Linesof 300 Action for EnergyConservation and Fuel Switching, in December 301 1980.35 The lines concretised the existing recommendations of the IEA.

302 The IEA once again emphasised the central role of the energy price. 303 Accordingtothe IEA [g]ov, ernment actions affecting price [ ... ]should

304 positively promote the effi cient use of energy and substitution away from 305 oil, .The IEA demanded that governments should serve as role models 306 for society in their energy use. They should also stimulate the energy 307 effi ciency of theindustryand monitor this process. Astrong 308 consideration was also given to the use of waste heat. The other chapters 309 recommended stronger insulation of buildings and certain measures for 310 the fuel effi ciency of automobiles, which could be infl uenced e.g. by the 311 level of fuel and road taxes.Finally, the IEA urged its members to further 312 reduce oil-fi red electricity generation. 313 , 314 The IEA sImpact 315 Although it is of course impossible to measure the direct impact of the 316 , IEA swork on its members energy use, we can at least detect achange in 317 governmental policies overthe time. The discussions in the IEA and its 318 strong focusonenergy conservation seemed to contribute to acommon 319 view of the possibilities of energy policy to infl uence the markets. Ashort 320 example is the West Germancase that can be studied by acomparison of 321 the energy programmes between 1973 and 1981.36 The fi rst West 322 German energy programme was published in 1973shortly before the fi rst 323 oil crisis.37 Alarmedbythe strong dependence on crude oil imports 324 and the development of the oil market, the social-liberal coalition 325 governmentemphasised the need for astronger use of coal and atomic 326 energy. Additionally,itjustifi ed the increase in oil stocks for short-time 327 supply shortages. The WestGerman government dedicated onlyasmall 328 paragraph of the energy programme to energy conservation. It is simply 329 mentioned as an option without any concrete measures. 330 OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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331 An update of theprogramme wasalready necessaryafter the fi rst 332 oilcrisisand waspublished on 30 October1974.38 It underlined the 333 internationalcontext of energy markets andthe need foraninternationally 334 coordinatedenergypolicy. TheWestGermangovernmentagain pointed 335 to thestrongdependenceoncrude oilimports andlistedthe meanstoshift 336 theenergybasis away from crudeoil.Itrepeatedthe demand to extend the 337 useofcoaland atomic energy in electricity generation.Thisemphasison 338 thesupplysideofenergycan also be recognised by acloserlookatthe 339 smallconservationparagraph.Itreferred to thegreat importance of energy 340 conservation,but stillcontained no concrete measures.The government 341 only announcedaprogrammetoinformprivate households aboutthe 342 possibilitiesofreducingenergyconsumption andwantedtoinvestin 343 research aboutthe consumer behaviour. Apartfromthat, thegovernment 344 expected asteeringfunctionofthe high energy price. 345 This disregard of conservation aspects changed withthe second 346 adaption of the programme in December1977.The West German 347 governmentnow judged the energy conservation aspect for the fi rst time 348 to be as valuable as the shift to coaland nuclear energy. 39 The 349 programme therefore not only touched the supply side but alsotargeted 350 at the private and industrial energy consumers. With amixture of 351 incentives and regulatorymeasures the West German government tried 352 to change the behaviour patterns of the consumers. This can be seen as a 353 fi rst step in amore interventionist approach to energy policy the West 354 German government had shied away from before. For example, the 355 governmenttightened the provisionsfor the insulation of new buildings 356 and subsidised the improved insulation of old ones. It announced new 357 requirements for heating systemsand subsidised the installation of solar 358 panels and the use of district heating. Additionally,itraised the tax on 359 lightfuel oil. Some minor measureswere the labelling of the energy 360 consumption on home appliances and anew norm for the calculation of 361 gasolineconsumption of cars. All in all, it was a fi rst attempttoin fl uence 362 the energy consumptionofprivate households and industry and an 363 adaption to the recommendationsofthe IEA, but mainly in one point OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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, 364 ignored them totally. The IEA sdemand for aspeed limit on motorways 365 was ataboo for the German government. The strong German car 366 industry should not be constrained.40 This overall tendencytostronger 367 focus on the behaviour of energy consumers was carried forward in the 368 third adaption of the energy programme in 1981.41 369 As thecaseofWestGermany showsthe energy programmeconverged , 370 more andmorewiththe IEA sapproachtoenergypolicy. Additionally,the 371 shifting focusofthe programmeonenergyconservationalsore fl ects the 372 strongoppositionofparts of societyagainst theexpansionofnuclear 373 energy. 42 In theperiodbetween 1973 and1981itbecameobvious that the 374 initiallyexpected shareofnuclear energy in thefutureenergymix was 375 unattainable – adevelopment that also contributedtothe rising 376 signi fi canceofenergyconservation. Buthow didthe unexpected relaxation , , 377 of theoil market in the1980s infl uencethe IEA sand itsmemberstates 378 view on energy policy? 379 380 The IEA and the Counter-Shock 381 Although the IEA had reached its aim of reducing dependence on oil, 382 especially from the Middle East, the relaxed marketand fallingprices 383 were aserious problem for the IEA. The prediction of atightening 384 market and rising prices had been acore belief of the IEA and its member 385 states. With its gloomypredictions the IEA had motivated its member 386 states to restructure their energy sector, butits prognosisabout the 387 dramaticsituation of the oil market in the midst of the 1980s proved 388 totally wrong.Now,the low oil demandofthe Western industrialised 389 countriesand the loss of infl uence of OPEC entailed the danger that the 390 IEAmembers would slowdown therestructuring process and 391 considerably increasethe consumption of cheap oil. Therefore a 392 backlash to the IEA aims loomed large. Would the IEA eventually 393 become avictim of its own success? 394 The IEA reacted in two ways. On the one side it evaluated the 395 situation in the oil marketastemporary. It therefore appealed to the 396 OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

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397 member states to hold on to their efforts of shifting the energy structure 398 away from oil. Aperfect example of this strategyisthe already mentioned 399 communiqué of the 1985 ministerial meeting. The perceived danger for ,

400 the IEA swork oozed out of every sentence. For example, the IEA andthe 401 ministers concl, uded that the present oil market situation is not to be

402 expected to extend far into the next decade and beyond , . 43 As the IEA s 403 secretariat predicted, wi, thin ten years,world demand for oil could 404 approach levels close enough to anticipated available production capacity 405 to produce upwardprice pressuresand to restore the condition of

406 vulnerability to supply disruptions which existed in 1973– 4and 1979 – 407 80, . 44 The consequencesofthis expectation were clear: 408 409 Ministers therefore agreed that it would be imprudent and even 410 dangerous for IEA countries to ignore forecasts of the IEA, 411 governments andindustry [ ... ]. They thereforeforcefully 412 underlinedthe importance of reducingfuturerisks by maintaining the energy policy directions already well established 413 in the IEA and continuing their vigorous implementation [ ... ].45 414 415 On the other side the IEA adapted to amore liberal approachinline with 416 the prevailing view of the economy in mostimportant countries of the 417 IEA. Decisive for this was the attitudeofthe US governmentthat 418 changed when Ronald Reagan took over presidency in January 1981. The 419 push for setting targets and quotas, favoured by the Carter government, 420 wasnow replaced by an emphasis on the free market. So, all the policies 421 , of targeting and measuring of the member states policies against ﬁ xed oil 422 import quotas or yardsticks were tacitly abandoned.46 Instead the IEA 423 , gavepriority to market solutions and deregulation of the member states 424 energy markets. Sincethe ministerialmeeting of 1981 thecommuniqués 425 refertothe importantcontributionofafull implementation and 426 strengtheningofmarketforcestothe objectives of theIEA. 47 Thefocus in 427 thefollowing yearswas especially on pricingand on free tradeofenergyin 428 themembercountries.Thisshift wasreinforcedwiththe appointmentof 429 OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

254 Oil Counter-Shock

430 thenew executivedirectorin1984. TheWestGermanUlf Lantzkewas 431 replaced by hiscompatriotHelga Steeg. Shehad been theheadofthe 432 department of tradeinthe EconomicsMinistryand wasanadvocateof 433 liberalmarkets.Inone of her ﬁ rstannouncements shestated: 434 435 Most of IEA work is in removing impediments to afree market in 436 oil, gas, coal and nuclear energy. [ ... ]Iam astrong believer in 437 letting themarketallocateenergy resources,and giving 48 438 governments as small arole as possible. 439 Conclusion 440

441 The chapter tried to discuss the contribution of the IEA and its reaction

, 442 to the count, er-shock of the oil marketinthe midst of the 1980s.First of 443 all, we have to state that one of its central aims wastoreduce its , 444 members dependence on oil, especially from the Middle East. To reach 445 this aim, the IEA developed the Long-Term Cooperation Program in 446 1976 and the GroupObjectivesand Principles on Energy Policy in 1977. 447 With these basically normativedeclarations, thememberstates 448 expressedguidelines for the restructuring of the energy sector and 449 developed apeerreviewprocess to secure compliance of the member , 450 states with the IEA spolicy objectives. Besides the substitution of oil use 451 by coaland nuclear energy and the development of alternative energy 452 sources, the IEA focused strongly on energy conservation. With various 453 declarations and reviews it tried to persuade its members to implement 454 energy conservation measures. As the example of West Germany shows , 455 the IEA was relatively successful in this respect. The basis for the IEA s 456 dramaticappeals to its memberstates to shift their energy basis away 457 from oil were gloomypredictions about the development of the 1980s oil 458 market. But instead of aforecasted very tightoil market, the market was 459 relaxed and prices fell drastically.Inthis period with its danger that the 460 IEA would becomeavictim of its own success, the IEA downplayed the 461 situation of the oil marketastemporary. Now it assumed atightoil 462 market in the 1990s and tried to convinceits members to stick to the OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

Reducing Dependence on OPEC Oil 255

463 established strategy. In parallel, the IEA adapted to the more market- 464 oriented approach of deregulation andfree energy trade that was also 465 advocated by the leading member governments and sought to secure its 466 relevance on the basis of this new mission. 467 468 Notes

469

1. Communiqué, of the IEA Meeting of the Governing Board at Ministerial 470 Level, 9July, 1985, ,inR.Scott, The History of the IEA – the First 20 Years, 471 vol. 3, Principal Documents (Paris, 1995), pp. 408– 22: 409. 2. Ibid., p. 408. 472 3. Francisco Parra, Oil Politics: AModern History of Petroleum (London, 2010), 473 p. 247. 474 4. In itsearly years, thecreation anddecision-makingprocedureofthe IEAwas seen as innovative and, therefore, attractedthe attention of political scientists

475

andlegal experts. Seeinter alia Robert Keohane, The, International Energy 476 Agency:State Inﬂ uenceand TransgovernmentalPolitics , ,in International

477 Organization xxxii/4 (1978),pp. 929– 52; Mason Willrichand MelvinConant,

, The, International Energy Agency:AnInterpretation andAssessment ,in

478 American JournalofInternationalLaw lxxi/2 (1977),pp. 199 – 223; Richard

479 Scott, In, novation in International Organization:The International Energy 480 Agency, ,in Hastings Internationaland Comparative LawReview i/1(1977),

pp. 1 – 56.

, 481 5. Ag, reementonanInternational Energy Program ,inR.Scott, TheHistory 482 of theIEA – theFirst 20 Years ,vol.1, Originsand Structure (Paris,1994), pp.353– 97:379– 81.

483

6. Telegram, US, Mission OECD, Paris, to Secretary of State, 20 November 484 1974, .Available at https://ﬁ le.wikileaks.org/oc/2474.2/186747.pdf (accessed 485 8November 2016). For preparation of the proposals in the US government see the documents 10, 14, 15, 17 and 18 in US State Department, Foreign 486 Relations of the United States (henceforth FRUS) 1969– 1976,vol. XXXVII, 487 Energy Crisis 1974– 1980 (Washington, DC, 2012). ,

488 7. The functioning and impact of OECD speer review process is analysed by

Martin Marcussen, Multilateral, Surveillance and the OECD: Playing the

489 Idea Game, ,inK.Armingeon and M. Beyeler (eds), The OECD and

490 European Welfare States (Cheltenham, 2004), pp. 13– 31; Id., OECD, 491 Governance through Soft Law, ,inU.Mörth (ed.), Soft Law in Governance and Regulation. An Interdisciplinary Analysis (Cheltenham, 2004), pp. 103– 492 26; Fabrizio Pagani, Peer Review: ATool for Cooperation and Change.

493 An Analysis of an OECD Working Method (Paris, 2002). 8. See e.g. Telegram, from the Embassy in France to the Department of State,

494

Paris, 18 October 1974, ,in FRUS 1969– 1976,vol. XXXVII, Energy Crisis 495 1974– 1980,doc. 10, pp. 50– 5; Telegram, from the Department of State to OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

256 Oil Counter-Shock 496 Secretary of State Kissinger in Isfahan, Washington, 2November 1974, ,ibid., doc. 14, pp. 61– 4.

497

9. Telegram, US, Mission OECD, Paris, to Secretary of State, 20 November 498 1974, .Available at https://ﬁ le.wikileaks.org/oc/2474.2/186747.pdf (accessed

499 8November 2016). 10. For the British position see e.g. telegram, US, Mission OECD, Paris, to

500 Secretary of State, 27 May 1975, .Available at https://ﬁ le.wikileaks.org/

501 oc/2476/93171.pdf (accessed 8November 2016).

, 502 11. See e.g. Memorandum, of Conversation, 20 February 1975 ,in FRUS 1969– 1976,vol. XXXVII, Energy Crisis 1974– 1980,doc. 43, pp. 146– 50.

503 , 12. Detlev, Rohwedder to Karl Otto Pöhl, Bonn, 4February 1975 ,Bundesarchiv 504 Koblenz (henceforth BaK), B102, vol. 201370. For the failure of the CIEC see 505 e.g. Giuliano Garavini, After Empires: European Integration, Decolonization, and the Challenge from the Global South 1957– 1986 (Oxford, 2012), 506 pp. 215– 30; Rüdiger Graf, O € lund Souveränität. Petroknowledge und 507 Energiepolitik in den USA und Westeuropa in den 1970er Jahren (München, 2014), pp. 325– 31.

508

13. Aufzeichnung, des Bundesministeriums für Wirtschaft betr. Programm für

509 langfristige Zusammenarbeit, Bonn, 7July 1975, ,BaK, B102, vol. 217831.

, 510 14. Walter Kittel, ,DasProgramm fürlangfristigeZusammenarbeit ,in

Wirtschaftsdienst lvi/3 (1976), pp. 123– 8: 124.

511 , 15. Lo, ng Term Co-operation Program ,inScott, History ,vol.3,pp. 177 – 204: 188. 512 16. Ibid., p. 172. 513 17. IEA executive director Ulf Lantzke admitted in alecture at the University of Cologne in 1977 that there were no concrete projects planned. See his lecture

514

series Zusammenarbeit, der Verbraucherländer in der Internationalen

, , 515 Energieagentur ,s, ession Praktische Zusammenarbeit in der IEA ,p.12, 516 in BaK, Nachlass Lantzke (N1360), vol. 154. See Peter Roggen, Die Internationale Energie-Agentur. Energiepolitik und wirtschaftliche Sicherheit

517 (Bonn, 1979), p. 129.

, 518 18. Detlev, Rohwedder to Karl Otto Pöhl, Bonn, 4February 1975 ,BaK, B102,

vol. 201370.

519

, 19. Long, Term Co-operation Program ,inScott, History,vol. 3, p. 179. 520 20. OECD, Energy Conservation in the International Energy Agency, 1976 Review

521 (Paris, 1976), pp. 34 and ff. 21. Brie, ﬁ ng Memorandum from the Acting Assistant Secretary of State for 522

Economic and Business Affairs (Katz) to Secretary of State Kissinger, 523 Washington, 16 July 1976, ,in FRUS 1969– 1976,vol. XXXVII, Energy Crisis 524 1974– 1980,doc. 100, pp. 357– 60: 359. 22. Ibid., p. 358. The tactics to use international commitments for domestic 525 policy goalswas lateralso appliedbythe Carter administration.

526 It instrumentalised the pressure of the 1978 G7 summit in Bonn and its 527 IEA commitments to decontrol the oil price. See John Ikenberry, Market, solutions for state problems: the international and domestic politics of 528 OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

Reducing Dependence on OPEC Oil 257 529 American oil decontrol, ,in International Organization xlii/1 (1988), pp. 151– 77.

530

23. Telegram, Embassy, Bonn to Secretary of State, Subject: IEA: US Position on 531 reduced dependence objectives proposal, 29 October 1976, .Available at

532 https://ﬁ le.wikileaks.org/oc/2082.2/274135.pdf (accessed 8November 2016). 24. Ministerial, Decision on Group Objectives and Principles for Energy Policy,

533 5 – 6October 1977, ,inScott, History,vol. 3, pp. 79– 90. 534 25. On the impact of the energy crisis on nuclear power policies see the

535 contribution of Duncan Connors and Eshref Trushin in this volume. 26. Ministerial, Decision on Group Objectives and Principles for Energy Policy,

536 5 – 6October 1977, ,inScott, History,vol. 3, p. 85. 537 27. Ibid., p. 87.

538 28. For the strengthening of the process see e.g. the 1978 review procedure

discussed in: telegram, Secretary, of State to Embassies, 23 November 1977, 539 Subject: Energy, IEA-SLT meeting on 14– 16 November 1977, .Available at

540 https://ﬁ le.wikileaks.org/oc/oc/2532/277210.pdf(accessed8November 2016); telegram, Embassy, Paris to Secretary of State, 23 May 1978, Subject:

541 Energy; IEA/SLT Meeting of May 18, .Available at https://ﬁ le.wikileaks.org/

542 oc/oc/2694/131296.pdf (accessed 8November 2016).

543 29. Ministerial, Decision on Group Objectives and Principles for Energy Policy, 5 – 6October 1977, ,inScott, History,vol. 3, p. 79. 544 30. The second oil crisis is described in detail in Wilfrid Kohl (ed.), After the 545 Second Oil Crisis: Energy Policies in Europe, America and Japan (Lexington, 546 1982); Parra, Oil Politics,pp. 215– 39; Daniel Yergin, Der Preis. Die Jagd nach O € l, Geld und Macht (Frankfurt am Main, 1991) [ The Prize (New York,

547 1991)], pp. 830– 83.

, 548 31. Action, on the Oil Market Situation in 1979 ,inScott, History,vol. 3, pp. 110– 13.

549 ,

32. Ministerial, Decision Conﬁ rming the Board sAction on the Oil Market 550 Situation in 1979, ,inScott, History, vol. 3, p. 113 and ff. 551 33. Robert J. Lieber, The Oil Decade: Conﬂ ict and Cooperation in the West

(New York, 1983), p. 29.

552

, 34. Ministerial, Actions on Short-Term Measures, 21– 22 May 1980 ,inScott, 553 History,vol. 3, pp. 114– 21.

554 35. Ministerial Lines of Action for Energy Conservation and Fuel Switching, 8 – 9 December 1980, ,inScott, History,vol. 3, pp. 206– 10. 555 36. For an evaluation of the West German energy programmes see Graf, O € l , 556 pp. 219– 30; from acontemporary leftist perspective Martin Meyer- 557 Renschhausen, Das Energieprogramm der Bundesregierung. Ursachen und Probleme staatlicher Planung im Energiesektor der BRD (Frankfurt and New

558 York, 1981).

559 37. Die, Energiepolitik der Bundesregierung, Drucksache 7/1057 vom 3. Oktober 560 1973, ,Deutscher Bundestag, 7. Wahlperiode. Available at http://dipbt. bundestag.de/doc/btd/07/010/0701057.pdf (accessed 8November 2016). 561 OCS Chapter12 — 1/2/2018— NANDHINI.P— 571975— IBTauris

258 Oil Counter-Shock

562 38. ,ErsteFortschreibung desEnergieprogrammsder Bundesregierung, Drucksache 7/2713 vom10. Oktober1974 , ,Deutscher Bundestag,7. 563 Wahlperiode.Available at http://dipbt.bundestag.de/doc/btd/07/027/

564 0702713.pdf (accessed8November 2016).

565 39. ,Zweite Fortschreibung desEnergieprogramms derBundesregierung, Drucksache 8/1357 vom 19. Dezember 1977, ,Deutscher Bundestag, 8. 566 Wahlperiode.Available at http://dipbt.bundestag.de/doc/btd/08/013/ 567 0801357.pdf (accessed 8November 2016). See Graf, O € l ,p.226 and ff.; 568 Meyer-Renschhausen, Energieprogramm, p. 128 and ff. 40. Meyer-Renschhausen, Energieprogramm,pp. 175– 84.

569

41. ,Dritte Fortschreibung desEnergieprogrammsder Bundesregierung, 570 Drucksache 9/983 vom 5.11.1981, ,Deutscher Bundestag, 9. Wahlperiode. 571 Availableathttp://dipbt.bundestag.de/doc/btd/09/009/0900983.pdf(accessed 8November2016). 572 42.See e.g. DieterRucht, Modernisierungund neue soziale Bewegungen. 573 Deutschland, Frankreich undUSA im Vergleich (Frankfurt am Main,1994),

pp. 443 – 73.The transnational dimension of antinuclearprotestsisemphasized

574

,, , , by Jan-Henrik Meyer, , Where do we go from Wyhl? Transnationalanti-

575 nuclearprotest targeting European andinternational organizationsinthe

576 1970s , ,in Historical Social Research xxxix/1 (2014),pp. 212 – 35. 43. Communiqué, of the IEA Meeting of the Governing Board at Ministerial

577 Level, 9July, 1985, ,inScott, History,vol. 3, p. 409. 578 44. Ibid. 579 45. Ibid. 46. Although, as Victor McFarland argues in his article in this volume, the , 580 change in energy policy was not as sharp as Reagan srhetoric suggested, ,

581 the Reagan government approached the IEA differently from Carter s

582 administration. See e.g. the ﬁ rst hints in Memorandum, from Secretary of Energy Duncan to President Carter, 4December 1980, ,in FRUS 1969– 1976,

583 vol. XXXVII, Energy Crisis 1974– 1980,doc. 289, pp. 910– 13: 910.

584 47. Communiqué, of the IEA Meeting of the Governing Board at Ministerial

Level, 15 June, 1981, ,inScott, History,vol. 3, pp. 385– 8: 386.

585 , , 48. Oil, sRole in the Energy Market ,in Petroleum Economist 52 (1985), p. 234 586 and ff.: 235. 587 588 589 590 591 592 593 594 OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

1 2 3 4 5 6 13 7 8 9 10 TheUnited States andthe OilPrice 11 Collapse of the1980s 12 13 14 Victor McFarland 15 16 17 The declineinoil prices that began in the early 1980s and accelerated in 18 1985 – 6had amajor impact on the United States,bothindomestic politics and in foreign affairs. The price collapse wasaboon for the 19 , 20 Reagan administration, which hailed it as avictory for Reagan sfree- 21 market approach to energy issues – even though the causesofthe price decline were worldwide. The United States,however, was not onlythe 22 , , 23 world slargest oil consumer; it was also one of the world slargest oil 24 producers. Low oil pricesrepresented acrisis for the domestic petroleum 25 industry and oil producing states in the south and west and, over the 26 longrun, the price collapse increasedAmerican dependence on imported 27 oil by encouraging consumptionand discouraging domestic production. 28 Partly as aresult, the Reagan administration expanded US military 29 involvement in the Middle East in order to secure the continued ﬂ ow of 30 oil from the Persian Gulf. Finally,while the 1980swere amoment of 31 triumph for oil consumers, they also represented amissed opportunity – 32 atime when the United States could have made more progress toward 33 energy conservation and alternatives to fossil fuels than it did. OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

260 Oil Counter-Shock

, 34 Reagan sEnergy Policies 35 During the 1970s, the US governmentattemptedtomeet the challenge of 36 the energy crisis through measures like lower highwayspeed limits, 37 mandatory fuel economy standards for automobiles, and oil price 38 controls. Jimmy Carter promoted the mostambitiouspolicy agenda of 39 all, establishing the Department of Energyand dramaticallyexpanding 40 funding for solar power, synthetic fuels derived from coal, and other 41 alternatives to imported oil. Carterallowed mostoil price controls to 42 expire in order to encourage conservation, but coupled that move with 43 new taxes on the oil industry.Healso stressed the importance of 44 conservation, including symbolicstepslike wearing acardigan sweater 45 during atelevised address in which he encouraged Americans to turn 46 their thermostats down in the winter, installing solar water heating 47

panels on the White House roof, and denouncing the excesses of

, consumerculture in his famous crisi, sofconﬁ dence speech in 1979. 49 Unfortunately for Carter, his presidency coincidedwith arenewed 50 energy crisis at the end of the 1970s that contributed to asharp economic 51 downturn and risingin ﬂ ation,which played amajor role in his defeat by 52 Ronald Reagan in 1980. 53 , Conservatives vehemently rejectedCarter sapproach to the energy 54 crisis. They attacked his emphasis on conservation and government 55 planning, calling instead for arenewedemphasis on free enterprise, 56 domestic production of fossil fuels, and unrestrained economicgrowth. 57 This condemnation of federal energy policy was an important part of the 58 broader conservative critique of an activist, interventionist government 59 during the 1970s.1 In 1977, the University of Chicago economist Milton

60 , Freedman wrote: Mr., Carter senergy programisamonstrosity. 61 If enacted, it will involve averylong step in the United States toward a

62 corporate state, towards centralization and federal control., 2 The 1980

63 Republican Party platform called for an end to shrin, king energy

prospects andexpanding government regulation and meddling, and a

, return to the, proven American values of individual enterprise . 3 During 66 OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

The United States and the Oil Price Collapse of the 1980s 261

67 his campaign for the presidency, Reagan promisedtoabolish the

68 Department of Energy, mockingly proclaiming that despiteits

69 mu, ltibillion-dollarbudget, in excess of $10billion ,ithad yettoproduce

, 70 aq, uart of oiloralump of coal or anything else in thelineofenergy . 4 , 71 Reagan s fi rst offi cial act after takingof fi ce was to sign an executive 72 order ending all remaining oil pricecontrols. The controls were already , 73 scheduled to expire by the end of the year, but the symbolism of Reagan s

74 action wasimportant. In his autobiography, he would write that

75 abolishing the price controls was my, ﬁ rst effort to liberate the economy 76 from excess governmentregulation , . 5 He told Congress in July 1981: 77 78 Our national energy plan should not be arigid set of production 79 and conservation goals dictated by Government. Our primary 80 objective is simply for our citizens to have enough energy, and it is 81 up to them to decide how much energy that is, and in what form and manner it will reach them. When the free market is permitted 82 to work the way it should, millions of individual choices and 83 judgments will produce the proper balance of supply and demand 84 our economy needs.6 85 , 86 TheReaganadministration cutthe Department of Energy snon- 87 nuclearbudget roughly in half,eliminating or sharply restricting 88 fundingfor researchand development in solarpowerand other ﬁ elds.7 89 Theadministrationpromised to boost domestic production of fossil 90 fuels by relaxing environmental regulations, part of abroaderanti- 91 regulatory approach that included slashing thebudget of the 92 Environmental Protection Agency (EPA).Opposition fromCongress 93 andadvocacy groups,however, forced Reagan to compromise on much

94 of that agenda.8 UnderReagan, manylongstandingprovisions in the

95 US taxcodethatfavouredthe oil industry (likethe ,depletion 96 allowance , )remainedinplace,while somewere scaled back. Many but 97 notall,ofthe taxcreditsfor conservation and alternative energythat 98 hadbeen passed during the1970s were eliminated.Reaganalsoended

, , 99 Carter s ,windfallproﬁ ts taxonthe oilindustry,although notuntil OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

262 Oil Counter-Shock

100 1988, after oilpricesfell anditbecame clearthatthe taxwould not 101 producethe expected revenues.9 102 Reagan was forced to compromise on other energy policy issues, as 103 well. His promise to abolish the Department of Energywas never carried 104 out. Congressional opposition helped preventReagan from eliminating 105 price controls on natural gas, which were not fi nallyabolished until , 106 after Reagan left offi ce.10 The Department of Energy sresearch and 107 development efforts continued during the 1980s, albeit at reduced levels, 108 and laid the groundworkfor subsequent breakthroughs in solar power, 109 wind turbines, compact fl uorescent lighting, unconventionalfossil fuel 110 extraction and other energy technologies. Federaltax credits and

111 research funding were critical, for example, in developing the hydraulic

, 112 fracturing techniques that have enabled the recent fracking, boom in oil , 113 and natural gas.11 Reagan sfunding cutsslowed progress on those 114 technologies, however, until federal support for energy researchwas 115 expandedagain starting in the 1990s after his presidency. 116 The Corporate AverageFuel Economy (CAFE) standards for 117 American automobilesestablished in 1975 also remained in place, 118 although Reagan didnot tightenthe standardsany further.12 Theaverage 119 effi ciency of vehicles on US roadsimprovedfrom13.1mpg in 1975 to over 120 21 mpgin1982, butthe progress stoppedthere.Infact, fuel effi ciency 121 actually fell to 19.3 mpgin2004,largely becauseofthe rise of heavier 122 vehicles like smalltrucksand sport-utilityvehicles(SUVs). TheCAFE 123 standards hadbeenintendedtoreduceoil consumption, buttheyhad the 124 additional positive consequence of sharplycutting carbon dioxide 125 emissionsfromthe US vehicle fl eet. Theaverage carbon dioxideemissions 126 pervehicle fell from 681g/miin1975to425 g/mi in 1982,but then,justas 127 with fuel economy, progress stopped forthe next twodecades. 13 128 129 Reagan and the Oil Price Collapse 130 Reagan took offi ce in 1981 just as oil prices peaked and began agradual 131 decline. In some ways, his policies contributed to that shift. The fi nal 132 OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

The United States and the Oil Price Collapse of the 1980s 263

133 elimination of oilprice controls alloweddomestic prices to risetothe , 134 world level, discouraging consumption. Reagan senvironmental policies 135 alsomade it easier to extract fossil fuelsinthe United States. Those policy 136 shiftsplayed only alimited role in shaping the energy market, however, 137 compared with previous policy decisions, the delayed impact of the 1970s , 138 oil crisis, and events beyond America sborders. The oil glut of the 1980s 139 had manycauses, some of which are discussedinthe other chapters in , 140 this volume.They included OPEC sdiffi culty in coordinating production 141 cuts; new production from non-OPEC areas likeAlaska, Mexico and 142 the North Sea; the increased use of non-oil fuelslike coal in power 143 generation; and increased energy effi ciency as both businesses and 144 consumers responded to the high oil prices of the 1970s. In the United 145 States, for example, the CAFE standards were phased in between 1978 146 and 1985.Even then,older automobileswere onlygradually retired and 147 replaced with newer, more effi cient models,soittook yearsbefore the 148 full benefi ts of the 1975 law were apparent.14 149 Nevertheless, the Reagan administration was quick to claim credit for

150 the decline in oil prices. In 1982 Secretary of EnergyJamesEdwards

151 declared that while energy had once been one, of our most serious

152 national problems, ,after less than two years of the Reagan presidency

, 153 that, era is behind us . 15 The 1984 Republican partyplatform boasted that

, , 154 Reagan s oil, price decontrol crippled the OPEC cartel ,liberating 155 Americans from the threat of further supply disruptions and radical price

156 hikes. 16 Reagan administration ofﬁ cials said much the same thing in

157 private. The Council on Environmental Quality told Reagan that the,

, , ,

158 optimists had been proven correc, t ,since oil price deregulation and a

159 return to market allocation had stimulated, both energy conservation 160 and production, . 17 , 161 The most dramaticapparent conﬁ rmation of Reagan spolicies was 162 the price collapse of 1985– 6. In an April 1986 radio address, Reagan

, ,, , , 163 said that my, mother used to tell me, It snot nice to crow ,but maybe

, ,

164 this once Ican thelp it ,proclaiming that his oil price dec, ontrol wasa

, 165 success because it let, freedom solve the problem through the magic of OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

264 Oil Counter-Shock 166 the marketplace, . 18 The Reagan administration underlined its rejection , 167 of Carter senergy policies later that year when it removed the solar 168 water-heating system from the White House roof that had been installed

169 by Carter. 19 The Wall StreetJournal hailed the decision, suggesting that

170 the panels be placed in amuseum as, areminder to Americans that any

,, ,

171 number of futile methodsofsolving the , energy crisis were attempted 172 before the right one, price decontrol, was fi nallyadopted, . 20 As aresult, , 173 the price collapse appeared to validate Reagan spolicies and reinforced 174 the US turn to free-market economics in the 1980s. , 175 Reagan smost committedsupporters would later claim that his role 176 in engineering the 1985– 6price collapse went beyond the liberalisation 177 of the US domestic oil market. Conservatives like journalist Peter 178 Schweizer and movieproducerStephen Bannon (subsequentlyaleading 179 advisor to Donald Trump)have suggested that the Reagan adminis- 180 tration convinced Saudi Arabia to fl ood the market with oil in orderto 181 undermine the SovietUnion.21 They argue that by providing military 182 and diplomatic supporttoSaudi Arabia, and particularly by ordering a 183 1981 sale of AirborneWarning and Control System (AWACS) , 184 surveillance aircraft to the kingdom, Reagan won the Saudis support 185 for lower oil prices.22 Ironically, considering its adoption by right-wing 186 fi gures in the United States,belief in aUS – Saudi conspiracy on oil was 187 previouslymore closely associatedwithforeigncritics of both

188 Washingtonand Riyadh, like the Islamic RepublicinIran.InMarch 189 1986, for example, the State Department reported that the, effort of Saudi 190 Arabia and the Gulfstates to recapture market share,thereby driving

191 prices down further, is seen by the Iranians as aplot to weaken them, 192 supportedifnot instigated by the US., 23 193 There is little evidence, however, to support the idea that US pressure 194 was decisive in convincing Saudi Arabia to increase production. By 1985, 195 Saudi Arabia had cut its production to around 2million barrels per day 196 in order to support the ofﬁ cial OPEC price. That was only around one- 197 ﬁ fth of Saudi capacity, far belowthe levelthat the kingdomneededto 198 balance its budget. In October 1985, the CIA estimated that Saudi Arabia OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

The United States and the Oil Price Collapse of the 1980s 265

199 wasrunning an annual budget defi cit of around $20 billion and had 200 already exhaustedroughly athird of its liquid international fi nancial 201 assets.24 The Saudi leadership thushad ample reasonsoftheir ownto 202 increase production and regain market share, punish other OPEC 203 member states for exceeding their production quotas, and suppress 204 competition from non-OPEC producers like Norway and Great Britain. 205 Thereisalso little reason to believe that US arms sales to Saudi 206 Arabia could have convinced the kingdom to act against its own 207 economic self-interest. The United States, after all, had been selling 208 weapons to Saudi Arabia for years before the mid-1980s. The most 209 notable example from before the Reagan administration wasJimmy , 210 Carter ssale of 60 F-15 fi ghters to Saudi Arabia in May 1978. The Carter 211 administration pushed the sale through Congress onlyafter an extensive 212 lobbying campaign and agreat expenditure of political capital.25 Even 213 that costly demonstration of supportfor Saudi Arabia, however, failed to 214 secure enough Saudi cooperation on oil pricingand production levels to , 215 prevent the massive price increases of 1978– 9. For that matter, Reagan s 216 1981saleofAWACS aircraft to Saudi Arabia also did not result in Saudi 217 help on oil pricesinthe short term. Over the next several years, Saudi 218 Arabia instead cut its production dramatically to support the OPEC price , 219 level. Only in 1985, withthe kingdom sbudget in dire straits, did Saudi 220 Arabia begin increasing production to regain market share. 221 222 The Economic Impact of the Oil Price Collapse 223 Another reason to doubt that the Reagan administration deliberately 224 engineered the price decline of 1985– 6was that the rapid price collapse 225 wasamixed blessing for the US economy.Itistrue that, in general, the 226

American economy tended to beneﬁ tfrom cheaper oil. During the 1970s,

227

, high priceshad contributed to economic stag, fl ation in the UnitedStates 228 and other industrialised nations. The stabilisation and gradual decline of 229 oil pricesinthe early 1980s helped the US economy,and most US 230 offi cials believed that further price decreases would be benefi cial. In early 231 OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

266 Oil Counter-Shock

232 1983, for example, the Central Intelligence Agency(CIA) andthe 233 TreasuryDepartment estimated that a40per cent decline in the price of 234 OPEC oil would add around 1.5– 2.0 per cent to the US GNP, cut the 235 inﬂ ation rate by around 2per cent, and improve the US current account 236 balance by around $35 billion.26 237 The generally positiveimpact of lower oil prices on the US economy, 238 however, maskedsigniﬁ cant differences between different industries and 239 different regions of the country. The 1985– 6price collapse was 240 disastrousfor the US oil industry.Smaller, independent oil companies 241 suffered most, since they relied on high-cost US petroleum that became

242 uncompetitiveonce the world price fell.27 A1987 report by the 243 DepartmentofEnergy concluded that in, dependent oiland gas

244 producers in the United States experienced especially large net income 245 losses in 1986,and many companies failed, . 28 246 The economicdamageextendedbeyond the oilindustry itself. Banks 247 and other fi rms that worked with oil companies also went bust as oil 248 prices fell. The American oil industry was concentrated in southern 249 and western states like Texas, Oklahoma,Louisiana, California and 250 Alaska. The high oil prices of the late 1970sand the beginningofthe 251 1980s had brought an economicboom to many of those regions.When 252 oil prices were near their height in 1981,for example, oil and gas 253 extraction accounted for about 20 per cent of the entire economy of 254 Texas and employed over 366,000 people,about 6per centoftotalnon- 255 farm employment in the state. The price collapse of the late 1980s was 256 devastating,causing the loss of 175,000 jobsand asevere recession.29 The 257 economicdownturn in Texas and other oil producing states depressed 258 local real estate markets and drove local fi nancial institutions into 259 bankruptcy,contributing to the nationwide savingsand loan crisisofthe 260 1980s and early 1990s.30 261 Critics warned that the oil price collapse threatened not only the , 262 country seconomichealth, but also its national security. Low prices 263 endangered the survival of smaller American oil companies and reduced 264 the profi tability of exploration and production in domestic American oil OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

The United States and the Oil Price Collapse of the 1980s 267

265 266 267 268 269 270 271 272 273 274

275 Figure13.1 US crude oil imports, 1970– 2015. 276 277 ﬁ elds. In the long run, low priceswould lead the country to becomemore 278 dependent on imported oil, reversing the progress made since the late 279 1970s. Those predictions were correct; after US oil imports fell during the 280 early 1980s, they began risingagain withthe 1985– 6price decline. US 281 dependence on imports grewsteadily for the next two decades, atrend 282 that was onlyreversed by the fracking boom of the late 2000s. 283 An arrayofpoliticians, commentators,and business ﬁ gures 284 (especially from the oil producingstates) called for atariff on imported 285 petroleum to save the domestic oil industry.They included many

286 Republicans and Reagan supporters. The chairmanofUnocal, for

287 example, declared in April 1986: The, United Statesisbeing offered a 288 modern-day Trojan horse of lower pricesand increasedOPEC supply., 31

289 That samemonth, the governors of Texas,Oklahoma, Wyoming, New 290 Mexico, NorthDakota and Kansas called for atariff, warning that our, oil

291 and gas industry is being destroyed and national securityisbeing 292 jeopardized, . 32 Dick Cheney,aUS Representative from Wyoming(and

293 future Vice President), introducedabill to establishatariff and argued:

294 Let, us rid ourselves of the ﬁ ctionthat low oil pricesare somehow good 295 for the United States. , 33 296 Some members of the Reagan administration also worriedabout the 297 impact of lower prices. JohnHerrington,the Secretary of Energy, warned OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

268 Oil Counter-Shock 298 that the, crisis in the domestic petroleum industry,anindustry that is

299 critical to our energy security, is taking an enormous toll and is creating 300 serious problems for the future, . 34 Vice President George H.W. Bush 301 suggested publicly that pricesmight havefallen too far. Shortly before he

302 left on adiplomatic visit to the Persian Gulfinspring 1986,Bush said

303 that the oil pricedecline threatened US interests. It, hink it is essential

304 that we talk about stability ,Bush said, and, that we not just have a

305 continued free fall, like aparachutist jumping out without aparachute, .

, ,

306 His plea, to the Gulf leaders, Bush explained, will be for the stability of 307 the marketplace, . 35 Bush himself had run an oil company in Texas before 308 entering politics, and his sons Neil Bush and the future presidentGeorge 309 W. Bush were bothoil executives, so he was sympathetic to the plight of 310 the petroleum industry.NewspapersinSaudi Arabia and Qatar , 311 enthusiastically reported on Bush scomments, with the Saudi daily Arab

, ,

312 News callingBush sstatement aw, atershed in US oil policy and

313 declaring: We, are glad the US has at last becomeconcerned with

,, , , 314 , stability in the oil market. 36 , , 315 Bush sremarks contradicted Reagan sstanceinfavour of letting the 316 free market decide oil prices, placing the administrationinanawkward , 317 position. The vice president sremarks angered Americans in oil-

318 importing states whobeneﬁ ted from cheap energy. An editorial in the

, 319 Detroit News was headlined: Bush, to Michigan: Drop Dead. 37 Other 320 members of the administration swiftly distanced themselves from the ,

321 vice president. Reagan sdeputypress secretarydeclared that the 322 administration believed the, way to achieve stability is to let the free

, , 323 market work ,while Secretary of State George Shultz explained: We, can t

324 correct the price fall by government intervention [ ... ]Wethink market

325 forces should settle this., 38 One White House ofﬁ cial mocked Bush as

, , , ,

326 poor, George ,calling his remarks agaffe that was not administration

327 policy, . 39 Reagan himself tried to paper over the differences between

, 328 himself and his vice president, claiming that in, his own way Bush had

329 be, en saying pretty much what I ve just been trying to sayherenow – that 330 thefreemarketis[... ]the answer to this, ,but that theadministrationhad OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

The United States and the Oil Price Collapse of the 1980s 269 331 to be awareofthe possibilitythat so, meoneisgoing to destabilize the

332 wholepetroleum industry by trying to take advantageofthispresent 333 situation, . 40 , 334 The evidence suggests that Bush sattitude on oil priceswas not 335 sharedbythe rest of the administration. In March 1986, apolitical aide

336 told MitchDaniels, asenior Reagan advisor, that while administration 337 ofﬁ cials were concerned about the plight of the oil industry, everyon, eis

338 in agreement that the government, in its effort to assist the industry, 339 should not do anything that causes the price of oil to rise, . 41 In its

340 instructionstoBush before his trip to Riyadh, the State Department 341 suggested he tell the Saudi leadership that the, recent slide in oil prices

342 has not changed our belief that prices and production levels arebest

343 determined by the market ,that we, believe lower oil prices will beneﬁ t

344 the world economy as awhole, ,and that the United States was opposed

345 to international talks aimedatin ﬂ uencing oil price, and production 346 levels, . 42 An ofﬁ cialwho accompanied Bush on his trip to the Persian , 347 Gulfrecalled that the vice president shopeofworking with the Saudi 348 leadership to stabilise the oil market was not backed by the rest of the 349 administration. During their meetingsinRiyadh, Bush hinted at his own 350 desire to see more stability in the oil market, butsaid nothing directly

351 and did not ask Saudi Arabia to restrict production.43 Afterwards, Bush

352 told the press that he had reiterate, dour desire to see marketforces at

353 work .Bush explained that our, interests and the interests of the Saudis

354 arenot identical when it comes to the pricing of oil ,since in, their view

355 the stronger the price for international oil, the better ,which does, not 356 coincide with the best interest of the United States, . 44 357 358 The United States and the Persian Gulf 359 While there is no strong evidence for aUS – Saudi conspiracy that 360 manipulatedoil pricesatwill, Washingtonand Riyadhdid strengthen 361 their diplomatic and military partnership during the 1980s. That 362 relationship went backdecades, butUSleaders began to place ahigher 363 OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

270 Oil Counter-Shock

364 priority on their relationship withRiyadhduring the 1970s. With the oil 365 boom of that decade, Saudi Arabia emerged as the most important 366 memberofOPEC and becamemuch wealthier and more infl uential. The 367 Carter administration sold advancedF-15 fi ghters to Saudi Arabia, began 368 negotiationswith states in and aroundthe Persian Gulfregion to secure 369 military basing rights, and established the Rapid Deployment Joint Task 370 Force (RDJTF), designed to deploy US armed forcestothe Gulf quickly 371 in the event of acrisis. 45 372 Although the Reagan administration marked asharp break with , 373 Carter sapproachinmanyother areas, there was agreat deal of , 374 continuity between Carter and Reagan spolicies in the Gulf. In large part, 375 this was becausethe Reagan administration agreed that, despite the fall in 376 oil prices and the easing of supply shortages during the early 1980s, the 377 continued fl ow of Saudi oil was vital to US national interests. A1984

378 National Security Council memorandum warned that the loss of Persian

379 Gulf oil for just three months coul, dplunge the world economy back into 380 recession, . 46 Even the mid-1980s oil glut and pricecollapse failed to alter , 381 this conclusion. In fact, Saudi Arabia sability to trigger the 1985– 6price 382 collapse by increasing production onlyseemed to underline the

, , ,

383 kingdom suniqueroleasOPEC s swing, producer .A1986 brieﬁ ng

384 paper prepared for Vice PresidentBush declared: Sau, di Arabia and the 385 Gulf Shiekdoms arethe driving force of the world oil market., 47 386 Over the long run, the price collapse also increased US dependence 387 on foreign oil, leadingUSof ﬁ cials to place an even higher priority on the

388 continued ﬂ ow of oil from the Gulf. In 1987 the State Department, 389 the Pentagon, the CIA, and the NationalSecurity Council reported: Over, 390 the next decade, the West,including the United States,will becomemore 391 dependentoninsecure oil supplies, particularly from the Persian Gulf. 392 This posesathreat to US national security interests. The decline in 393 surplus production capacity will leave the West more vulnerable to

394 supply disruptions, price manipulation, and attempts to use oil as a 395 political weapon. , US ofﬁ cials worried that the threat of afuture 396 embargo, evenifnot carried out, could underminethe unity of the OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

The United States and the Oil Price Collapse of the 1980s 271

397 Western alliance by inducing Western Europe and Japan to distance 398 themselves from the United States.48 399 Fearsofrenewed supply disruptions encouraged the United States to 400 strengthen its relationship with Saudi Arabia during the 1980s.In1981

401 Reagan reafﬁ rmed the US commitmenttothe Gulfstates,telling 402 reporters that Saudi Arabia and its neighbours provide, the bulk of the 403 energy that is needed to turn the wheels of industry in the Western

, ,

404 world ,and there, snoway that we could stand by and see that taken over

405 by anyone that would shut off that oil .Reaganalso declared that we, will

, , 406 not permit Saudi Arabia to, be an Iran ,suggesting that the United States 407 would defend the Saudi monarchy against internal revolutionaswell 408 external attack.49 Soon after coming to offi ce, the Reagan administration 409 decided to sell advanced weaponry to Saudi Arabia, including AWACS 410 aircraft and additional equipment for the Saudi F-15 fi ghters. Those sales 411 met with intense opposition from supporters of Israel, forcing the 412 Reagan administration to spend vital political capital pushing the arms 413 packages through Congress. 414 Saudi Arabia was important not only as an oil exporter, but also as an 415 increasingly infl uential player in regional politics and asource of aid to 416 anti-communist causes in the Middle East and beyond. The most famous 417 example wasthe war in Afghanistan, where Saudi Arabia and the United 418 Statesjoined with Pakistan to backthe anti-communist Afghan 419 mujahedeen. Pakistan itself also received arms and fi nancial aid from the 420 UnitedStates and Saudi Arabia. The Reagan administration supported 421 Pakistan andthe mujahedeen partly becauseSovietvictory in

422 Afghanistan might pose athreat to the Gulf. The US embassy in 423 Islamabad wrote that aleading US objective in Pakistan wasto preserv, e 424 the stability of the Persian Gulf and to ensure the continued ﬂ ow of oil to

, 425 the West and Japan, ,and emphasised the need to supportPakistan s 426 militarycooperation with the Gulfstates.50 427 Otherthreats to Saudi Arabia and the other Arab states of the Gulf 428 camefrom the Iran– Iraq war that began in 1980.Bythe mid-1980s the 429 UnitedStates wasincreasingly concerned that Iran might winthe war OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

272 Oil Counter-Shock

, 430 and toppleSaddam Hussein sregime, exposing the Gulfstates to Iranian 431 attack. In 1985,the CIApredicted that if the war spread to Saudi Arabia, 432 the results could be disastrous for the world oil market, causingoil prices

433 to risebetween $15 and $40 per barrel and severely reducing economic 434 growth in the oil-importing countries. The CIA concluded that the,

435 United States has alarge stake in the continued ﬂ ow of oil from the 436 Persian Gulf , . 51 437 Over the course of the Iran– Iraq war, the United Statesincreasingly , 438 sided with Iraq and provided Saddam Hussein sregime with intelligence, 439 supplies, and other assistance to preventanIranian victory. The Reagan 440 administration also expanded US capabilities to intervene in the Gulf 441 directly, upgrading theRDJTF into theUSCentral Command 442 (CENTCOM), the ﬁ rst high-level US military command dedicated to

443 the Middle East. As early as 1983,inresponse to an Iranian threat to 444 disrupt oil shipping,Reagan declared: Id, onot believe the free world

445 could stand by and allow anyone to close the Straits of Hormuzinthe 446 Persian Gulf to the oil trafﬁ cthrough those waterways., 52 In 1987 the 447 United States began reﬂ agging and escorting Kuwaiti-owned oil tankers 448 that month as part of Operation Earnest Will. US naval vessels and other 449 militaryunits clashedwithIranian forces on severaloccasions, 450 culminating in the accidental downing of an Iranian civilian airliner, 451 killing nearly 300 passengers, by the USS Vincennes in July 1988. 452 453 Conclusion 454 , Reagan sforeignpolicy decisions had lasting consequences for the 455 United Statesand the Persian Gulf. The dramatic expansionofUS 456 military involvement in the Middle East during the 1980slaid the 457 groundwork for the GulfWar of 1990– 1, the invasions of Afghanistan

458 and Iraq in 2001and 2003, and the broader post-September 11 wa, ron

459 , terror, .Reagan sstrategyinthe Gulf, however, was limited by political 460 opposition from Saudi Arabia and other key local partners, who did not 461 wish to appear too close to the United States and downplayed their 462 OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

The United States and the Oil Price Collapse of the 1980s 273

463 militaryrelationshipswith Washington. One consequence was that the 464 Reagan administration could not fi nd aGulfnation willing to host the 465 headquartersofCENTCOM, which had to be located at MacDill Air 466 ForceBase in Floridainstead of in the Middle East.53 That lack of local 467 support would be amajor obstacle to US foreign policy in the Middle 468 Eastduring the subsequent decades. 469 Another long-term problemwas the failure of the United States to , 470 makemore progress on energy conservation. Although Carter senergy 471 plan would haveexpanded reliance on coal, ahigh-pollutionfuel,Carter 472 alsopromotedinvestment in energy effi ciency, solar powerand other 473 alternativestofossil fuels. Those investments were curtailed under 474 Reagan. More generally, Carter encouraged aconservationist ethos, 475 whereas Reagan endorsed freewheeling energy consumption and fossil 476 fuel production. Much of the progress toward greater energy effi ciency 477 made during the 1970s stagnated or even went into reverse,a 478 development facilitated by cheaper oil. With the threat of climate change 479 becoming ever more pressing, future historians may well look back on 480 that failure to make greater progress on energy conservation as one of the 481 most signifi cant consequences of the 1980s oil price decline. 482 483 Notes 484

1. Meg Jacobs, Panic at the Pump: The Energy Crisis and the Transformation of

485 American Politics in the 1970s (New York, 2016); and Id., The, Conservative 486 Struggle and the Energy Crisis, ,inB.Schulman and J. Zelizer (eds), Rightward Bound: Making America Conservative in the 1970s (Cambridge, 487 MA, 2008), pp. 193– 209.

488 2. Milton Friedman, The Future of Capitalism (Stockholm, 1977), p. 11.

, 489 3. Republican, Party Platform of 1980 ,15July 1980, in University of California at Santa Barbara American Presidency Project (APP). Available at http:// 490 www.presidency.ucsb.edu/ws/index.php?pid¼ 25844 (accessed 12 February 491 2017). 492 4. Presidential Debate in Cleveland, 28 October 1980, APP. Available at http:// www.presidency.ucsb.edu/ws/index.php?pid¼ 29408 (accessed 12 February 493 2017). 494 5. Ronald Reagan, An American Life: The Autobiography of Ronald Reagan 495 (New York, 1999), p. 227. OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

274 Oil Counter-Shock

496 6. Reagan, Message, to the Congress Transmitting the National Energy Policy Plan, ,17July 1981, APP. Available at http://www.presidency.ucsb.edu/ws/ 497 ?pid¼ 44096 (accessed 12 February 2017). 498 7. Terrence Fehner and JackHall, Department of Energy, 1977 – 1994:

499 ASummary History (Washington, DC, 1994), p. 37.

, 8. Jeffrey Stine, Natural, Resources and Environmental Policy ,inW.E. 500 Brownlee and H.D. Graham (eds), The Reagan Presidency: Pragmatic

501 Conservatism and Its Legacies (Lawrence, 2003), pp. 233– 56.

, 502 9. Salvatore Lazzari, Energy, Tax Policy: History and Current Issues ,10June 2008, Congressional Research Service, p. 6. Available at https://fas.org/sgp/ 503 crs/misc/RL33578.pdf (accessed 13 March 2017). 504 10. Franklin Tugwell, The Energy Crisis and the American Political Economy: 505 Politics and Markets in the Management of Natural Resources (Stanford, 1988), pp. 129– 31. 506 11. Michael Shellenberger, Ted Nordhaus, Alex Trembath and Jesse Jenkins,

507 Where, the Shale Gas Revolution Came From: Government sRole in the Development of Hydraulic Fracturing in Shale, ,The Breakthrough Institute, 508 May 2012. Available at http://thebreakthrough.org/images/main_image/ 509 Where_the_Shale_Gas_Revolution_Came_From2.pdf(accessed 12 February

510 2017). 12. Michael Sivak and Omer Tsimhoni, Fuel, Efﬁ ciency of Vehicles on US

511

Roads: 1923– 2006, , Energy Policy,xxxvii/8 (2009), pp. 3168– 70.

512 13. US Environmental Protection Agency, Light-Duty, Automotive Technology, 513 Carbon Dioxide Emissions, and Fuel Economy Trends, 1975 through 2013, . Available at https://www.fueleconomy.gov/feg/pdfs/420r13011_EPA_LD_

514 FE_2013_TRENDS.pdf (accessed 12 November 2017).

515 14. US Department of Transportation, Su, mmaryofFuelEconomy Performance, 516 28 April2011 , .Available at http://www.nhtsa.gov/static ﬁ les/rulemaking/pdf/ cafe/2011_Summary_Report.pdf (accessed12February2017). 517 15. Fehner and Hall, Department of Energy,p.36. 518 16. Republican Party Platform of 1984, 20 August 1984, APP. Available at http:// www.presidency.ucsb.edu/ws/index.php?pid¼ 25845 (accessed 12 February 519

2017).

520 17. CouncilonEnvironmentalQuality, ,15th Annual Report:Environmental 521 Quality1984, ,Beryl Sprinkel Papers Box 10, Folder: DPCMeeting withPresident RE AcidRain, RonaldReaganLibrary (RRL), Simi Valley, 522 CA. 523 18. Reagan, Radio Address to the Nation on Oil Prices, 19 April 1986, APP. 524 Availableathttp://www.presidency.ucsb.edu/ws/?pid ¼ 37156 (accessed 12 February 2017).

525 , , 19. Where, Did the Carter White House sSolar Panels Go? , Scientiﬁ cAmerican, 526 6August 2010. Available at http://www.scientiﬁ camerican.com/article/

527 carter-white-house-solar-panel-array (accessed 12 February 2017).

, 20. Wall Street Journal, Goodbye, to All That ,25August 1986. 528 OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

The United States and the Oil Price Collapse of the 1980s 275

, 529 21. Peter Schweizer, Victory: The Reagan Administration sSecret Strategy that Hastened the Collapse of the Soviet Union (New York, 1994), pp. 50– 1and 530 , 242– 3; and Reagan sWar: The Epic Story of his Forty-Year Struggle and Final 531 Triumph over Communism (New York, 2002), pp. 238– 41; Stephen Bannon , 532 (dir), In the Face of Evil: Reagan sWar in Word and Deed (2004). 22. For acritique of the idea that Reagan deliberately bankrupted the Soviet

533

Union by reducing oil prices, see David Painter, From, Linkage to Economic 534 Warfare: Energy, Soviet-American Relations, and the End of the Cold War, , 535 in J. Perovic( ed.), Cold War Energy: ATransnational History of Soviet Oil and Gas (London, 2017), pp. 283– 318.

536 ,

23. John Whitehead to George Bush, Scope, Paper for Vice President sTrip to 537 Persian Gulf and Arabian Peninsula, ,28March 1986, National Security Council (NSC) Records, Near East &South Asian Affairs Directorate 538 , (NESAAD), Box 7, Folder: VP sTrip to Persian Gulf and Arabian Peninsula, 539 Brieﬁ ng Book, No. 1, RRL. 540 24. US Central Intelligence Agency (CIA), National Intelligence Daily, 1October 1985, p. 10, from CIA FOIA Electronic Reading Room (ERR). Available at 541 http://www.foia.cia.gov/document/0005500140 (accessed 12 February 2017). , 542 25. Rachel Bronson, Thicker than Oil: America sUneasy Partnership with Saudi

543 Arabia (New York, 2006), pp. 142– 3. 26. CIA, Co, mmentsonTreasuryAnalysesofa40%Dropinthe PriceofOPEC

544 Oil , ,CIA ERR. Availableathttp://www.foia.cia.gov/sites/default/ ﬁ les/ 545 document_conversions/89801/DOC_0000242528.pdf (accessed12February

546 2017).

, 27. Margaret Walls and Andrew Jones, The, US Oil Industry Response ,in

547 S. Shojai and B. Katz (eds), The Oil Market in the 1980s: ADecade of Decline

548 (New York, 1992), pp. 114– 30; and Dillard Spriggs, Impact, of the Oil Price 549 Decline on US Oil Companies, ,inW.Kohl (ed.), After the Oil Price Collapse: OPEC, the United States, and the World Oil Market (Baltimore, 1991), 550 pp. 132– 47. 551 28. US Department of Energy, Energy Security: AReport to the President of the United States (Washington, DC, 1987), p. 5.

552 ,

29. Stephen Brown and Mine Yücel, The, Effect of High Oil Prices on Today s 553 Texas Economy, , Southwest Economy 5(September/October 2004).

554 30. Congressional Budget Ofﬁ ce (CBO), The Economic Effects of the Savings &

, Loan Crisis (Washington, DC,1992),pp. xi,8and47; Be, hind theS&L Crisis , 555 CongressionalQuarterly EditorialResearchReports,vol.II(Washington,DC,

556 1988).

557 31. John Given, Ex, pertsWarnCheap OilCould Mean GreaterVulnerability Later , , TheAssociatedPress,2April1986. Availableathttp://www.apnewsarchi 558 ve.com/1986/Experts-Warn-Cheap-Oil-Could-Mean-Greater-Vulnerability-

559 Later/id-7255cfe6c8340b44063716d3c7adb2ab(accessed 12 February 2017).

, 560 32. Robert Reinhold, 6G, overnors Ask for Federal Tax on Imported Oil , New York Times,16April 1986. 561 OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

276 Oil Counter-Shock

, , 562 33. Richard Oppel, Cheney, Tax Plan from 86 Would Have Raised Gas Prices , New York Times,6April 2004. 563

34. US Department of Energy, Energy Security,p.iii.

, 564 35. Timothy McNulty, White, House: Oil-Price Policy Firm , Chicago Tribune, 565 3April 1986. 36. US Embassy in Riyadh to Secretary of State, 4April 1986; US Embassy in 566 , Doha to Secretary of State, 7April 1986; both in NESAAD Box 7, Folder: VP 567 sTrip to Persian Gulf and Arabian Peninsula, Cables, No. 1, RRL.

568 37. Larry Eichel, Bush, sRemarks on Oil Prices Raise New Doubts About His Political Savvy, , Philadelphia Inquirer,13April 1986.

569 38. Jacobs, Panic at the Pump,p.288.

570 39. Lou Cannon and Paul Taylor, Bush, Remarks on Oil Prices Cause His

571 Advisors Concern, , Wall Street Journal,8April 1986.

, 40. Leonard Silk, Economic, Scene: Reagan, Bush and Oil Prices , New York 572 Times,11April 1986. 573 41. Haley Barbour to Mitchell Daniels, 24 March 1986, Edward Stuckey Files Box 7, Folder: Oil Prices 1986, RRL. 574 , 42. Whitehead to Bush, 28 March 1986, NESAAD Box 7, Folder: VP sTrip to 575 Persian Gulf and Arabian Peninsula, Brieﬁ ng Book (No. 1), RRL. , , 576 43. Author stelephone interview with former member of Bush sstaff, 31 October 2016. 577 44. US Consulate in Dhahran to Secretary of State, 7April 1986, NESAAD Box , 578 7, Folder: VP sTrip to Persian Gulf and Arabian Peninsula, Cables (No. 1),

579 RRL. 45. Olav Njølstad, Shifting, Priorities: The Persian Gulf in US Strategic Planning

580

in the Carter Years, , Cold War History,iv/3, pp. 21– 55 (2004); and William

, 581 Odom, The, Cold War Origins of the US Central Command , Journal of Cold 582 War Studies,viii/2 (2006), pp. 52– 82. 46. William Martin and Roger Robinson for Robert McFarlane, 21 May 1984,

583 from NESAAD Box 9, Folder: Persian Gulf 1984, RRL.

, 584 47. Saudi, Arabia and the World Oil Market ,n.d. but c. April 1986, from Shirin

Tahir-Kheli Files Box 3, Folder: VP Trip (3), RRL.

585

, 48. Is, There aNational Security Threat? Appendix to DPC Memo to Reagan, 27 586 April 1987, from Sprinkel Files Box 11, Folder: 04/29/1987 Meeting RE

587 Energy Security, RRL. 49. Steven Weisman, Reagan, Says US Would Bar aTakeover in Saudi Arabia

588

that Imperiled Flow of Oil, , New York Times,2October 1981. William Saﬁ re

, ,

589 named Reagan sstatement the Reagan, Corollary to the Carter Doctrine in

, 590 The, Reagan Corollary , New York Times,4October 1981. 50. US Embassy in Islamabad to Secretary of State, 13 March 1986, in NESAAD 591 Box 4, Folder: US– Pakistan Consultative Group Fourth Meeting (5 of 5),

592 RRL.

, 593 51. CIA Directorate of Intelligence, Impact, of aPersian Gulf Oil Cutoff ,CIA ERR, 5August 1985. Available at http://www.foia.cia.gov/sites/default/ﬁ les/ 594 OCS Chapter13 — 1/2/2018— NANDHINI.P— 571976— IBTauris

The United States and the Oil Price Collapse of the 1980s 277

595 document_conversions/89801/DOC_0000833177.pdf (accessed 12 February 2017). 596 52. Reagan, News Conference, 19 October 1983, APP. Available at http://www. 597 presidency.ucsb.edu/ws/?pid¼ 40666 (accessed 12 February 2017). 598 53. On local political sensitivities blocking aCENTCOM headquarters in the Gulf, see the documents in NESAAD Box 3, Folders Middle East – 599 CENTCOM (1 and 2), RRL. 600 601 602 603 604 605 606 607 608 609 610 611 612 613 614 615 616 617 618 619 620 621 622 623 624 625 626 627 OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

1 2 3 4 5 6 14 7 8 9 10 Back to the Future: ChangesinEnergy 11 Cultures andPatterns of Consumption 12 13 in theUnited States, 1973–86 14 15 16 Elisabetta Bini 17

18 On 14 April 1986, Time magazine devotedalong article to the oil plunge

, 19 of the 1980s. Titled Che, ap Oil! ,the articlewas accompaniedbya 20 dramaticfront cover, which highlighted the contradictory effects the 21 counter-shock could have, namely that the lowering of oil pricescould be

22 at the same time good and bad news. The author, StephenKoepp, 23 pointed out that last, week consumers, businessmen and tradersaround 24 the world watched in awe as the price of crude dipped below $10 per bbl. 25 for the ﬁ rst time in almost adecade. Oil, which as recentlyasJanuary was

26 selling for $26 per bbl., wasonabreathtaking – and dangerous – ride 27 down aslippery slope, . 1 He went on to argue that while lower prices 28 beneﬁ ted consumers around the world, they could translate into higher 29 unemployment rates, bankruptcy for small businesses and political 30 turmoil. Furthermore, they could lead to agrowing dependence of the 31 United States on foreignoil, apossibility that – in light of 1970senergy 32 crisis – seemedparticularly dangerous, also for the domestic oil industry. 33 On the other hand,Koeppnoted,cheap oil prices might boost the OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

Back to the Future 279

34 American economy, alongwith that of Western European countries and 35 Japan. In his conclusion, the author argued reassuringly that, compared

36 to the 1970s, the United Stateswould not becomehostagetothe 37 Organization of PetroleumExporting Countries (OPEC). Rather, in, 38 contrast to how it fared in the difﬁ cult decade of the 1970s, the US now 39 standsasawinner in the energy game. [ ... ]Itshould aim to preserve its

40 oil independence so that the economy can keep cruising down the road 41 instead of sputteringtothe curb once again., 2 , 42 In Koepp sview, the counter-shock seemedtooffer unlimited 43 possibilities for American consumers, almost areturn to the forms of 44 conspicuousconsumption that had characterised the post-World War II 45 decades. The articlewas part of amuch wider discussionabout the 46 meaning andconsequences of the counter-shock, and on the possibility 47 for Americans of continuing to have access to mass motorisation – a 48 symbol of freedom and democracy. These debates involved politicians, 49 advertisers and consumers, and intersected with awider series of 50 confrontationsnot onlyabout energy transitions, but also about national , 51 identity, America splace in the world, and the relationship between the 52 governmentand citizens.

53 This chapter examinesthe cultural representations of gasoline

, 54 consumption in the United Statesbetween the 1973 oil, shock and the 55 1986counter-shock. It focuses on the ways in which companies, 56 advertisers, politicians and consumers promoted or challenged gasoline 57 consumption, at aturning point in the history of international oil 58 politics. Iargue that the growthofgasoline consumption that followed 59 the counter-shock should be understood as part of alonger history of

60 changing paradigms of energy consumption, which characterised the

61 UnitedStates betweenthe mid-1970s and the late1980s. While the 1973 , 62 oil shock, was accompanied and followed by acritique of the formsof 63 conspicuousconsumption experienced by Americans for mostofthe

64 twentieth century,inthe ﬁ rst half of the 1980s Ronald Reagan s

, 65 administration promotedanenergy culture (a pe, troculture )centred on 66 the idea that every American should have the right to low gasoline prices. OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

280 Oil Counter-Shock

67 This change, which intersected with the rise of the New Right,was partly 68 aresult of aconsumer culture that emerged in the second half of the 69 1970s, which gavenew legitimacy to individualistic formsofconspicuous 70 consumption. While moststudies have interpreted the 1970sasadecade 71 of lost opportunities in the energy sector, this chapter argues that the US 72 government, companies and consumers largely supportedcontinued 73 access to lowoil prices, which they viewed as part and parcel of American 74 deﬁ nitions of national security, identity and personal freedom. 75 76 Oil Cultures 77

From amethodological point of view,this chapter draws on recent

, studies that have highlighted the importance oil, cultures have had in 79

American history.InJune 2012, the Journal of American History devoted

, an entire issue to the topic of Oil, in American History . 3 The over 81 20 articles that were included addressed avariety of themes, such as the 82 relationship betweenoil and empire, the importance oil has had in 83 shaping the American century and US foreignpolicy, and labour and 84 environmental protestsagainst the oil industry.Several essays also 85 examined the cultural aspects and implications of oil, and the forms of 86 conspicuous consumption made possible by the oil economy.That same 87

year, the Journal of American Studies published awhole issue on

, Oil, Culture ,with essaysonthe visual and written representations of 89 petroleum during the twentieth century,inworks of art, documentaries, 90 museumsand other institutions.Byadoptingavariety of methodological

91 approaches, the articles eluc, idate[d] the complex role that imaginative 92 , representations have played in establishing and contesting oil sstatus as 93 the primary commodity underpinning modern economic expansionand 94 afundamental ontological construct shaping social and political lifein

95 the UnitedStates and beyond , . 4 96

The two journal issues intersected with awider set of studies coming

, from the energy, humanities ,which have pointed out the important role 98 the humanities might (and should) have in providing useful answers to 99 OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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100 the current geological era – the Anthropocene – dominated by climate

101 change and resource scarcity.Drawing on, and intersecting, different

, , 102 disciplines, the energy, humanities have been arguing for the essential 103 contribution that the insights and methodsofthe human sciences can

104 maketoareas of study and analysis that were once thoughtbest left to the

, 105 natural sciences . 5 Theyhave highlighted the need to recognise that, , 106 today senergyand environmentaldilemmasare fundamentally

107 problems of ethics, habits, values, institutions, belief, and power – all 108 traditional areas of expertise of the humanities, . 6 In recent publications, 109 scholars haveanalysed the intersection between energy and modernity, 110 the relationship between energy, power and politics, and philosophical, 111 literary and aesthetic interpretations of energy. 7 112 With few exceptions, oil culture has remained on the margins of 113 studies about the 1970senergy crisis and the 1986counter-shock, which 114 havetended to focus on international or business relations. This chapter

115 highlights the importance of considering oil not only in terms of the

, 116 economy and politics, but also as ac, ultural material ,whose presence is 117 felt in our everyday lives, social relations and cultural practices.8 It builds ,

118 on Ross Barrettand Daniel Worden sde ﬁ nition of oil culture as a 119 dynam, ic ﬁ eld of representations and symbolicpracticesthat have [ ...]

120 helped to produce the particular modes of everyday life that have 121 developed around oil use, ,toexamine the different meanings Americans

122 assigned to oil consumptionduring the 1970s and 1980s. 9 Furthermore,

,, , , 123 drawing on studies of automobility, as a , multilinear ensemble of

124 commoditites, bodies of knowledge, laws, techniques, institutions, 125 environments, nodes of capital, sensibilities, and modes of perception, , 126 this chapter emphasises the importance of analysing the cultural

127 and social practices that have accompanied the spread of mass

128 motorisation, and the emergence of ah, ighlyspeciﬁ cconceptionofwhat 129 it means to be modern and free, . 10 As Cotten Sellers has argued,

130 automobilitywas (and is)particularlycentraltothe American

131 experience, an essential componentof the, dominant meaning of

,, ,, , , , , 132 , America and American in thetwentieth century . 11 In this framework, OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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133 access to cheapgasoline – andthe meaningdifferentactorsassignedtoit 134 during the1970sand 1980s – reinforced theimportanceofautomobility 135 in American politics,culture andsociety. 136 , 137 Redeﬁning the Consumer sRepublic 138 It is hard to overestimate the importance gasoline has had in shapingthe 139 American economy,society and culture after World War II. Between 140 1950 and 1973, Americans had access to some of the cheapestgasoline in 141 the world ($2 per barrel), and the price of energy decreased steadily by

142 5per cent each year.AsThomasBorstelmann has put it, for, two 143 generations, Americans [ ... ]considered easy access to inexpensive 144

gasoline as almost abirthright, ade ﬁ ning feature of what it meant to be

145

, , American . 12 All this changed quite rapidly with the 1973 oil, shock , 146 which represented aturningpoint for what Lizabeth Cohen has deﬁ ned 147 , as the Consumer sRepublic. As the spendable real income of afamily of 148 four declined by 1.7 per cent between1969 and 1979 (mostly due to

149 , inﬂ ation), for, the ﬁ rst time in the postwar period, the Consumer s 150 Republicasaprescription for an economy and political culture no longer

151

seemed viable , . 13

152

, The American government responded to the oil, shock in avarietyof 153 ways.14 One of them was to pass aseries of laws aimed at reducing 154 gasoline consumption. While this shift in American politics and oil 155 , culture is usually associated with Jimmy Carter sadministration (the ﬁ rst 156 US president to put solar panels on the White House), most reforms 157 , receivedfullbipartisansupport and severalpreceededCarter s 158 presidency. Startinginthe mid-1960s, single states and the federal 159 governmentintroduced aseries of lawstoregulate pollution and offshore 160 drilling, after several major blowouts occurred on offshore platforms 161 in the Gulf of Mexico and California. While the state of California 162 passed legislation aimed at limiting car emissions, PresidentLyndon 163 , B. Johnson sadministration promoted clean-air regulation. In August 164 1973, just afew weeks before the outbreak of the Yom Kippur War, 165 OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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166 PresidentRichard Nixonincreased fundingfor public transportationand,

167 in November 1973, introduced thedaylightsavinglaw.Inthe aftermathof

, 168 the1973 oi, lshock ,Congressstrengthenedthese formsofregulation: 169 it passed the55mile-per-hour speedlimit law, theright on redlaw,and 170 theEnergyPolicyand Conservation Act, whichintroducedef fi ciency 171 standardsfor cars andappliances. In 1977,the Carter administration 172 approved thecreationofthe DepartmentofEnergy(DDE),while federal 173 taxincentivespromotedthe useofrenewable sourcesofenergy. At the 174 same time,the EnvironmentalProtectionAgency (EPA) – whichwas 175 establishedjustafewyears earlierin1970 – banned theuse of leaded 176 gasoline andenforcedfuelef fi ciency standards.15 177 While these laws aimed at limiting gasoline consumption, during 178 the 1970s American prices continued to be much lower than those of 179 the world market, given that the American government remained 180 committedtoproviding consumers with cheap gasoline.The Nixon, 181 Ford and Carteradministrationsall promotedpolicies aimed at keeping 182 the price of oil low, while Congress challenged efforts to discourage 183 gasolineconsumption. As aresult, oil consumption in the United States 184 increased from 11.5 million barrels per day in 1965 to 18.8 million 185 barrels per day in 1980.Inthis context, car manufacturers adopted a 186 dualstrategy: while they started producing and advertising more 187 fuel-effi cient cars, they also marketed anew vehicle, the light truck, 188 which was not subject to the formsofregulation enforced by the 189 Corporate Average Fuel Economy (CAFE). WhenCAFEwas introduced, 190 it defi ned lighttrucks as work vehicles for businessmen and farmers, 191 rather than as normal vehicles, even though they were mostly used by 192 families for theirprivate transport. Underthiscategory, light trucks did

193 nothavetocomplytofuelef ﬁ ciency or environmentalstandards.

194 As DavidCampbell hasargued, ,it was aconsumer politics of identity 195 that motivated thedistinction between cars andlight trucks, ,and 196 intersected variousinterests,suchasthose of consumergroups, 197 companiesand Congressmen.16 Carmanufacturersthus developed a 198 market segment that wasnot only protected throughlegislation anda OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

284 Oil Counter-Shock

199 tariff on imports, butwas alsohighlyrequestedbyAmerican 200 consumers.Asaresult, thegains madepossible by thelegislation on 201 fuel efﬁ ciency came to be undermined by thespreadofincreasingly 202 large, heavyand inefﬁ cient cars.17

203 Despitethese effortstocontinuepromoting gasoline consumptionand

, 204 mass motorisation,the 1973 oi, lshock didaffectthe US system of , 205 automobility in severalimportant ways.AsOPECchallengedcompanies 206 activities on theinternational oilmarketand in oilproducing countries, 207 thelandscape of gasoline consumptionchanged rapidly. By 1979,more 208 than half of US gasstationshad been shut down or were abandoned, as oil 209 ﬁ rmsmoved away from non-pro ﬁ tablemarkets.Between 1970 and1980, 210 thenumberofgas stations decreasedfrom216,059to111,657, aprocess 211 that affected especially thesmaller independentcompanies.Bythe end

212 of the1970s, 85 percentofthe gasoline sold in theUnitedStatescarried 213 thebrand name of amajor oilcorporation,since th, emajorssubsidized

214 theirmarketing operations from pro ﬁ ts obtained in othersegments of 215 theindustry , . 18 Firmsincreasinglysubstituted dealerswithself-service 216 stationswhere customers – in thenameofef ﬁ ciency andsaving – carried 217 outthe work,while at thesametimetakingoff themarketall thefree 218 gadgetstheyoncehandedout to drivers.19 , 219 In this framework, Carter sadministration introduced aseries of 220 changes that had important consequences on the relationship between , 221 the governmentand citizens and, more generally, on America soil 222 culture. Carter embraced the idea that the world – let alonethe United 223 States – could not continuetopursue andpromote an unlimited growth 224 and tried to enforceapost-growth model, groundedinenergy taxes,

225 lower levels of consumption, conservation and fuel efﬁ ciency. In 1977,he

226 pointed out that, we, must face the fact that the energy shortage is 227 permanent, all of us must learn to waste less energy, . 20 His aim was to 228 reduce oil consumption and imports by promoting variousformsof 229 conservation, and developing alternativesources of energy,such as coal,

230 nuclear and solar power. Aturning point in Carter spresidencywas

, 231 undoubtedly his so-called malais, espeech ,which criticised the formsof OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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232 conspicuousconsumption that characterised Americansociety. Accord-

233 ingtoCarter, mass consumption was not asign of success, freedom or

, , , 234 democracy, but rather createdasense of emptin, ess and fragmentation . , ,

235 In this view, one of the causes of Americans demoralisationwas citizens

236 support of a mistake, nidea of freedom,the right to grasp for ourselves

237 some advantage over others, . 21 He called for material sacriﬁ ce rather

238 than fulﬁ llment, and pointed out that, too, many of us now tend to 239 worship self-indulgence and consumption, . 22

, ,

240 Carter s malaise, speech was in many ways prophetic, but it did not 241 appeal to Americans. As Gary Cross has argued, few, saw the problem as

242 overconsumption. Instead, Americans blamedAmerican oil companies

,, , , ,

243 for , contriving the crisis and Arab nationsfor holdingAmerica

, 244 hostage ,, . 23 While some – especially environmentalists – embraced , 245 Carter sconservation ethic, the US Senaterepeatedly undermined his 246 proposals,pointing out that high prices would damageAmerican 247 consumers. During the 1970s, Americansactually increasedtheir use of 248 electricity by 50 per cent, while oilcompanies carried out an aggressive 249 campaign portraying the government and environmentalists as the cause 250 of the energy crisis, and athreat to the American way of life. The level of

251 resistance and opposition Carter encountered wassuch that he wrote in

252 his diary that it, was like pullingteethtoconvincepeople that we had a 253 serious problem, . 24 Americans were not ready – nor used – to embrace 254 austerity, which seemed so distantfrom the idea that access to goods 255 represented the heart of American democracy and freedom.25 , 256 Criticism of Carter spolicies camenot onlyfrom Congress, the 257 Senate and oil companies, but from citizens and consumer groupsas 258 well. This aspect of the story deservestobeexaminedinsome detail, and , 259 sheds light on aseries of wider changes in America soil culture and 260 culture of consumption, which help explain the rise of neoconservatism , 261 and Ronald Reagan svictory in 1980.26 Following the economic crisis of 262 the 1970s, many Americans and consumer movements embraced anew 263 form of consumerism, which was more individualistic and fragmented 264 (and fragmenting) than in the past. It wasgrounded in the idea that every OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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265 Americanshouldhaveaccesstoconsumergoodsprovided by 266 corporationsinafree market, and becamepart of the gospel promoted 267 by the New Right andthe Reagan administration.This new emphasis on 268 individual formsofconsumptionmarked ashift away from post-World 269 War II interpretations of the relationship between government, business 270 and consumer citizens, and put an end to alonger history of consumer 271 activism dating backtothe 1930s.27 272 Theforms of consumerismthatemerged in thelate1970s 273 underminedmanyofthe resultsofthe consumermovementwhich 274 were achieved using new political tools to push the federal governmentto 275 regulate the market. Many of thesechanges were the outcome of the 276 grassroots formsofmobilisation that characterised the counterculture of 277 the 1960s, and of longer-term formsofconsumer activism, symbolised , 278 by the National Consumers League.While afederal consumer agency 279 never cameinto being, the production, marketing and distribution of 280 consumergoodsbecamethe object of regulation, and new agencies 281 enforced safety in the workplace, on highways and in the environment.28 282 Ralph Naderembodied the new set of political issues promoted by 283 these consumer movements. By demanding greater legislativeand 284 regulatory protection for citizens, especially drivers, Nader played a 285 crucial role in organisingcitizen consumers. His 1965 bestseller, Unsafe 286 at Any Speed: The Designed-in Dangers in the AmericanAutomobile, 287 encouraged consumers to use court cases to increase safety, and laid the 288 groundwork for the passageoflegislation suchasthe Vehicle National 289 Trafﬁ cand Motor Safety Act. By deﬁ ning the consumer movement as a

, , 290 people, smovement ,heoffered anew political language that could

291 appeal to many constituencies across class, racial and ethnic divides. 292 As Cohenhas put it, in, an increasingly postindustrialera of service 293 sector growth and more pervasivemiddle-class identity [ ... ]invoking 294 the rights of consumers ideally cast awide net over the populace, and 295 speciﬁ cally offered amoreincluse discourse about the exploitation of

296 consumers in place of the more divisive industrial-era discourse about 297 the exploitation of labor, . 29 OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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298 Thesemovements intersected with, and contributed to shape, the 299 debates that accompanied the energy crises of the 1970s, which 300 represented aturning point for American consumers and consumer

301 movements. As Brian Black has recentlyargued,the conservation ethic

302 that emerged during the 1970s introduced an, ew paradigm for

303 consumption, ,embodied by green capitalism and green consumption, 304 which proved, to be acrucial catalyst for the energy transition from

, 305 petroleum dependence, . 30 In Black sview,the debateover The Limitsof

306 Growth had profound implications for consumer behaviour, and was 307 accompaniedbyanew interp, retation of the nature of energy supplies

308 [and] the application of anew environmental perspective into everyday 309 lifeand also into regulative policy, .However, the 1970s were also 310 characterised by theemergence of formsofconsumption and 311 consumerism that were not associated with green capitalism,but rather 312 with new formsofmarket-oriented individualism. These substituted the 313 emphasis on public interest that had characterised earlier consumer 314 movements and becameincreasingly popular in the second half of the 315 1970s, paving the way for the re-emergence of conspicuous consumption 316 underthe Reagan administration. 317 This shifthad alot to do with awider set of transformations in the 318 relationshipbetweenthe government, consumer-citizens andconsumer 319 movements, andcontributed to narrow thede ﬁ nition of consumer 320 citizenship. Theconsumerculture that emerged in thesecond half of the 321 1970s encouraged consumers to thinkofthemselvesasindividuals 322 pursuing theirown self-interestinafreemarket,orassubcommunitiesof

323 people boundtogether by shared consumer practices andinterests.Inthis 324 view, id, entifyingasaconsumermeant thinking of oneself notinthe broad 325 identity termsoriginallyintendedbythe promotersofconsumer

326 citizenshipinthe 1930s[...]but rather in narrower ways,aspartof 327 distinctconstituencies of consumers, . 31 As themarketacquiredmore

328 importance, andinthe context of agrowing gapbetween the rich andthe 329 poor, co, nsumer became more aclaim to personal entitlement thana

, 330 commitment to society scollective well-being, . 32 By thelate1970s,personal OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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331 identity wasassociated with individual spending,ashiftsymbolised by the 332 impressive increase in creditcardspendingand low-cost brokerages. 333 This interpretationofconsumerism went hand in hand with, and 334 gave legitimacy to, the riseofneoliberalism.33 Agrowing numberof 335 individual consumers and consumer groups attributed inﬂ ation and high

336 oil prices to government spending, social services and labour unions,and

, 337 accused multinational oil companies(big, oil )ofcontrolling the world 338 market. As mostpolls showed, Americans ﬁ rmly believedthat the energy 339 crisis wascaused either by oil companies, by the government or by 340 producingcountries, and that if the market was left alone it would make 341 cheap gasoline available to consumers. Those supporting these ideas 342 came mostly from the suburbs (thevery symbol of American oilculture),

, , 343 and represented Nixon s silent, majority ,aswell as the new middle

344 classes moving to the regions of the Sunbelt. As Matthew Huber has

345 argued, for, most Americans, the energy crisis was less about geopolitical

,, ,

346 confrontation and foreign policy and more about the , shock of gasoline 347 lines and limits to everyday geographies of social reproduction, . 34 In the 348 context of discussions about US decline, consumers refused to accept 349 that the American way of life could be challenged, and emphasised their 350 rights as consumers, in the framework of meritocratic individualism and 351 free market ideology.35 352 353 The New Right and the Rise of New Forms of 354 Conspicuous Consumption 355

In cultural and social terms, the 1979 energy crisisprobably carried more

356

, meaning than the 1973 oil, shock .The re-emergence of lines at the gas 357 pumps wasaccompaniedbypanic among American consumers, and by 358 the organisation of strikes in the suburbs, which symbolised the essence 359 of the motorised American way of life. Truck drivers as well as citizens 360 protested the high price of gasolineand the formsofregulation 361 introduced by the government, in ways that were moreintenseand 362 radical than in previous years.36 363 OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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364 Theimportancecompanies, advertisers, politicians, consumer 365 movements and individualconsumers assignedtolow gasoline prices , 366 during the 1970sshaped citizens reaction to the 1979energy crisis and , 367 laid the groundworkfor Reagan svictory in 1980.The new president – 368 whowas elected partly thankstothe supportofthe oil industry – 369 embraced the idea that by cutting taxes,reducing the governmentde ﬁ cit, 370 and increasing defence spending, he could assure Americans alimitless 371 economic growth. In his view, the market was by deﬁ nition virtuous, 372 allowing consumers to choose amongavariety of differentproducts.

373 As Director of the US Ofﬁ ce of Consumer Affairs Virginia Knauer

374 argued in 1982, when, businesses are allowed to regulate themselves, 375 competition will ensure that savings will trickle down to consumers, . 37 376 Regulation, on the other hand,slowed down economicgrowth and 377 challenged competition in the free market, instead of promoting public 378 interest, as the consumer movementofthe early 1970s had argued.

379 Deregulation had clear and positiveeffects on consumers, allowingthem

380 to make their, ownchoicesinthe free marketplace . 38 Therefore, the 381 government should, not second-guess suchchoices with laws that

, 382 regulated packaging, advertising, or sale of harmful products, . 39 Reagan s 383 view of the relationship between governmentand consumer citizenship , 384 wasparticularly clear in his 1987 America sEconomicBill of Rights,

, 385 which deﬁ ned economic freedom as an individual s right, to contract 386 freely for goods and services and to achieve[their] full potential without

387 government limitsonopportunity,economicindependence, and 388 growth, . 40 389 Theinterpretation of consumptionadvanced by theReagan 390 administration wasfar from universalistic. According to it,consumption 391 should not be accessible to everyone, but only to the worthy, and it 392 should not be accompanied by notions of collective rights and social 393 cohesion. The relationship establishedbetween consumption and 394 worthiness was typical of the political ideologyofthe New Right,

395 which pointed out that access to consumption should be the result of 396 hard work and discipline. As such, it accused, liberals of promising access OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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397 to the American bountytopeople who had contributed too littleto

398 prosperity and blamed the Left for raisingimpossible expectationsofa 399 bottomless cornucopia, . 41 This interpretationrevived aseries of tropes 400 typical of the Victorian era, and adapted them to the context of the 1980s. 401 Accordingtopublic opinionmakers suchasIrving Kristol, the 402 counterculture of the 1960s had undermined the balance between 403 freedom,discipline and democracy that had characterised American , 404 culture and society for mostofthe nation shistory. As a Washington

405 Post editorial put it, We, dgottentoo fat, too comfortable, too 406 uncompetitive., 42 In this view,Reagan wassupposed to enforce anew , 407 discipline, by promoting Americans sense of sacrifi ce and turning away 408 from the excesses of the 1970s. In afree market, desire should be 409 channelled into entrepreneurship and the family. 410 At the same time, though, the New Right promoted anew, and partly 411 contradictory, form of consumer citizenship, embodied by yuppies 412 (young urban professionals). While yuppies were chastised by the Right 413 as well as the Left as nouveaux riches whose only preoccupation was to , 414 spend money, they actually incarnated the New Right semphasis on 415 the linkbetween worthiness, discipline and consumption. Far from 416 being idle, they combined work and leisure,byworking out while 417 watching business news or competing with each other through forms 418 of conspicuous consumption. They also considered spending aform 419 of work, and pursued highlyindividualistic formsofconsumption, 420 depending on their age,gender and lifestyle.43 421 Allthese social and cultural changes constituted the backbone of a 422 new oil culture introduced by the Reagan administration. Duringthe , 423 fi rst half of the 1980s, Reagan abandoned Carter semphasis on the 424 importance of conserving energyorpursuingenergyef fi ciency. 425 He supportedthe exploration of new oil fi elds, and gave new legitimacy 426 to oil corporations, choosing aformer oilexecutive – George W. Bush – 427 as vice president. In July 1981,hesubmitted to Congress the National ,

428 Energy Policy Plan, which promoted the idea that the government s 429 primary, objective is simply for our citizens to have enough energy, and it OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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430 is up to them to decide how much energy that is, and in what form and 431 manner it will reach them, . 44 Furthermore, he cut funding for the EPA 432 and deregulated the price of oil and naturalgas, in order to increase 433 production and lower prices for consumers. As aresult, by the early 434 1980s the gasoline taxes Americans paid were only one eighthofthose 435 paid by consumers in other industrialisedcountries.45 436 Oneofthe mostsigniﬁ cant outcomes of these changeswas the 437 popularity lighttrucks achievedinthe mid-1980s,justbefore the 438 counter-shock. In 1984, the AmericanMotorsCorporation (AMC) 439 started producingthe Jeep Cherokee and, two years later, Ford 440 began marketingthe Ford Explorer. By doingso, carmanufacturers 441 established aniche forSportsUtility Vehicles(SUVs), which 442 by theearly1990s took over the Americanmarket. As David 443 Campbell hasargued, thesuccessofthe Jeep Cherokee resulted from , , 444 companies andadvertisers abilitytomeet Americanconsumer 445 desires. When theAMC startedmarketing theJeep – avehicle used in 446 World WarII – to Americans in theearly1970s,itappealedto

447 ,afﬂ uent families in urbanareaswho respectedJeep smilitaryheritage 448 andwanted to be associated with itsoutdoor image , . 46 By themid-

449 1980s,consumerdesireshad changedand ﬁ rms, as wellasadvertisers, 450 responded to agrowing ,paramilitaryculture that emerged after, and

, 451 in response to, America sdefeatinVietnam , ,and characterised many 452 babyboomers. Mass motorisationwas notassociated with family

453 consumptionorforms of leisure, butratherwithanew deﬁ nition of

454 masculineindividualism,symbolisedbyadesire to ,feel abondwith 455 thegreatoutdoors andthe Americanfrontier, . 47 Not surprisingly,in

456 theirstudy of consumers desires, Ford designers noted that, ,many

457 people were wearing cowboy hats andother Western attire, ,and

458 emphasised the attention themedia was giving to ,thetwo Jeepsthat 459 Reagan kept in hisranch nearSanta Barbara, California, . 48 Despitethis 460 initialemphasisonarugged form of masculinity,inthe following years 461 light trucks (and laterSUVs) came to be considered an urbanluxury 462 vechicle, whichwas moreand more catered to youngfamilies, who OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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463 wished to associate themselves with an adventurousway of life in the 464 outdoors.49 465 By the timeoil pricesplunged in 1986,Americans were ready to 466 pursue anew form of conspicuousconsumption that resembled that of 467 the post-World War II period,but was much more individualistic, 468 selﬁ sh, and damaging for the environment. During and after the counter- 469 shock, the Reaganadministration pointed out that the decrease in oil 470 prices represented aclear sign of the success of the free market, and 471 highlighted the triumphofthe American way of life, embodied by 472 privatisedformsofconsumption. In the context of the counter-shock, 473 the forms of conservation that characterised the 1970s were marginalised 474 even further, while Americans built largerhouses, expanded their 475 suburbs,and bought more cars (increasingly less fuel efﬁ cient).

476 By the early 1990s, American consumers were ready for SUVs, the

, 477 embodiment of af, orm of radically individualistic citizenship . 50 From 478 the mid-1980s, SUVs becamethe fastest growing category in motor 479 vechicle sales, while sales of Jeep Cherokees skyrocketed. Between 1987 480 and 1995, the percentageoflight trucks on the total of passenger vehicles 481 grew from 30 per cent to 41,5 per cent,reaching ahigh of 63 per cent in 482 2001. Over the years, advertisersincreasingly associated SUVs with 483 individual and national security, especially after the September11, 2001 484 attacks andinthe contextofthe Iraq war. With the production and 485 marketing of the Hummer and of the HighMobility Multipurpose

486 Wheeled Vehicle (Humvee),which was usedduring the First GulfWar,

, 487 SUVs cametosymbolise militariz, ed frontiers . 51 It is signiﬁ cant that by

488 the 1990sthose expressing adesire to buy an SUV were mostly women

489 and, in particular, mothers, who became military, ﬁ gure[s], confronting, 490 but safe from,aninsecure world, . 52 491 In cultural, socialand economic terms, the effects of the counter-

492 shock were not univocal. Duringthe 1990s, several important regulations

, 493 introduced after the 1973 oil, shock continued to remain in place, while 494 advertisements kept emphasising the importance of fuel and car 495 efﬁ ciency. Car manufacturers, on the other hand,startedproducing OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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496 electric vehicles and, adecade later, hybrid cars, which were embraced by 497 aconsumer culture sensible to issues of conservation and reachedahigh 498 levelofpopularity in the UnitedStates and abroad.53 Nonetheless, the 499 centrality of oil in American life remained in place and acquiredanew 500 centrality during the 1980s and 1990s. Two years after the counter-shock, 501 Stephen Koepp wrote another article for Time magazine,which argued 502 that one of the consequences of the continued centrality of oil in 503 American life was that consumers found themselves increasingly stuck

504 alongcongested highways, as they moved farther away from their 505 workplace in remote suburbs. According to Koepp, grid, lock is more 506 than just an irritant. The epidemicofslow-motion sickness is costing the

507 US billions of dollars in lost productivity and wasted fuel. It is polluting 508 the atmosphere with hydrocarbons,spoiling some Americans, taste for , 509 travel and inﬂ uencing where families choosetolive and work. 54 By the 510 late1980s, the consumerculture that emerged in the second half of the , 511 1970s, coupled with companies desire to keep gasolineprices low and , 512 the NewRight semphasis on free market individualism, had produced a 513 series of distopic effects which would deﬁ ne American oil culture for 514 years to come. 515 516 Notes

517

, 1. Stephen Koepp, Cheap, Oil! , Time,14April 1986. 518 2. Ibid. 519 3. Oil in American History,special issue of Journal of American History ic/1

(2012).

520

, 4. Ross Barrett and Daniel Worden (eds), Oil, Culture ,special issue of Journal 521 of American Studies xlvi/2 (2012). See also Roger M. Olien and Diana Davids 522 Hinton, Oil and Ideology: The Cultural Creation of the American Petroleum

Industry (Chapel Hill, 2000).

523 , 5. Dominic Boyerand Imre Szeman, The, rise of energy humanities , University 524 Affairs/Affaires universitaries online,12February2014. Availableathttp://www. 525 universityaffairs.ca/opinion/in-my-opinion/the-rise-of-energy-humanities/. 6. Ibid. 526 7. Imre Szeman and Dominic Boyer (eds), Energy Humanities: An Anthology 527 (Baltimore,2017);JeffDiamanti andBrent Ryan Bellamy, Energy 528 Humanities,special issue of Reviews in Cultural Theory vi/3 (2016). OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

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529 8. Ross Barrett and Daniel Worden (eds), Oil Culture: The Cultural Life of Oil – from Aesthetics and Politics to Economy and Ecology (Minneapolis, 2014), 530 p. xx. See also Stephanie LeMenager, Living Oil: Petroleum Culture in the 531 American Century (New York, 2014); David Nye, Consuming Power: ASocial 532 History of American Energies (Cambridge, MA, 1999). 9. Barrett and Worden, Oil Culture,p.xxiv.

533

10. Cotten Seller, Republic of Drivers: ACultural History of Automobility in

,, , ,

534 America (Chicago, 2008), p. 6and 2. See also John Urry, The, System of 535 Automobility, , Theory, Culture &Society xxi/4– 5(2004), pp. 25– 39. 11. Seller, Republic,p.7.See also Sebastian Herbstreuth, Oil and American 536 Identity: ACulture of Dependency and the Impact on US Foreign Policy 537 (London, 2016); Brian Black, Crude Reality: Petroleum in World History 538 (Lanham, 2014).

12. Thomas Borstelmann, The 1970s: ANew Global History from Civil Rights to

539 Economic Inequality (Princeton, 2013), p. 57; Brian Black, Oil, for Living: 540 Petroleum and American Conspicuous Consumption, , Journal of American History ic/1 (2012), pp. 40– 50. 541 , 13. Lizabeth Cohen, AConsumer sRepublic: The Politics of Mass Consumption in 542 Postwar America (New York, 2003), p. 388. 543 14. Fiona Venn, The Oil Crisis (London, 2002); Meg Jacobs, Panic at the Pump: The Energy Crisis and the Transformation of American Politics in the 1970s 544 (New York, 2016).

545 15. Robert Lifset (ed.), American Energy Policy in the 1970s (Norman, 2014);

, 546 Paul Sabin, Crisis, and Continuity in U.S. Oil Politics, 1965– 1980 , Journal of American History ic/1 (2012), pp. 177– 86.

547

16. David Campbell, The, Biopolitics of Security: Oil, Empire, and the Sports 548 Utility Vehicle, , American Quarterly lvii/3 (2005), pp. 943– 72: 954. 549 17. Ibid. 18. John Jakle and Keith Sculle, The Gas Station in America (Baltimore, 1994), 550 p. 77. 551 19. Michael Palm, Technologies of Consumer Labor: AHistory of Self-Service (London, 2016). 552 20. Public Papers of the Presidents of the United States: Jimmy Carter, 1977 553 (Washington, DC, 1977), p. 70. 554 21. Public Papers of the Presidents of the United States: Jimmy Carter, 1979 (Washington, DC, 1979), p. 1238. 555 22. Ibid., p. 1237.See also Gary M. Fink andHughDavidGraham(eds), The

556 Carter Presidency:PolicyChoices in thePost-NewDealEra (Lawrence, 1998);

557 Daniel Horowitz, JimmyCarterand theEnergyCrisisofthe 1970s: The Cr, isis of Con ﬁ dence , Speech of July 15,1979 (New York,2004);Kevin Mattson,

558 , ,

Wh, at theHeckAre YouUpTo, Mr.President? :Jimmy Carter,America s

, 559 Ma, laise andthe Speech that Should Have Changedthe Country (New York, 560 2009). 561 OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

Back to the Future 295

562 23. Gary Cross, An All-Consuming Century: Why Commercialism Won in Modern America (New York, 2000), p. 161. 563

24. New Yorker,27March 2000.

, 564 25. George Will, Who, Put Morality in Politics? , Newsweek,15September 1980; 565 Martin Melosi, Coping with Abundance: Energy and Environment in Industrial America (Philadelphia, 1985); David Nye, Consuming Power 566 (Cambridge, 1998). , 567 26. For asimilar argument, see Victor McFarland schapter in this volume. 568 27. Meg Jacobs, Pocketbook Politics: Economic Citizenship in Twentieth-Century America (Princeton, 2007); Kathleen G. Donohue, Freedom from Want: 569 American Liberalism and the Idea of the Consumer (Baltimore, 2003). 570 28. Cross, An All-Consuming Century. , 571 29. Cohen, AConsumer sRepublic,p.351; Robert D. Holsworth, Public Interest Liberalism and the Crisis of Afﬂ uence: Reﬂ ections on Nader, Environment-

572 alism, and the Politics of aSustainable Society (Cambridge, MA, 1980).

573 30. Brian Black, Energy, Hinge? Oil Shock and Greening American Consumer Culture since the 1970s, ,inE.Bini, G. Garavini and F. Romero (eds), Oil 574 Shock: The 1973 Crisis and its Economic Legacy (London, 2016), pp. 198– 575 221: 204. , 576 31. Cohen, AConsumer sRepublic,p.387.

32. Ibid.

577 , 33. On the link between the 1973 oil, shock and the rise of neoliberalism: 578 Timothy Mitchell, Carbon Democracy: Political Power in the Age of Oil 579 (London, 2011), pp. 173– 99. 34. Matthew T. Huber, Lifeblood: Oil, Freedom, and the Forces of Capital 580 (Minneapolis, 2013), p. 108. , 581 35. Ian Rutledge, Addicted to Oil: America sRelentless Drive for Energy Security 582 (London, 2005).

36. Huber, Lifeblood,pp. 97– 100.

583 37. Laissez-Faire, Consumerism , New York Times,21August 1982.

, , 584 38. Knauer, sTheme – the Satisﬁ ed Customer , New York Times,14September 1984; Public Papers of the Presidents of the United States: Ronald Reagan, 585 1983 (Washington, DC, 1984). 586 39. Cross, An All-Consuming Century,p.200; Matthew Hilton, Prosperity for All:

Consumer Activism in an Era of Globalization (Ithaca, 2009).

587 , , 40. Ronald Reagan, America, sEconomic Bill of Rights ,3July 1987, in 588 University of California at SantaBarbara American Presidency Project 589 (APP). Availableathttp://www.presidency.ucsb.edu/ws/?pid ¼ 34513(accessed 590 26 July 2017). 41. Cross, An All-Consuming Century,p.193. 591 42. Washington Post,5June 1983. 592 43. Kevin Ferguson, Eighties People: New Lives in the American Imagination 593 (New York, 2016). 594 OCS Chapter14 — 1/2/2018— NANDHINI.P— 571977— IBTauris

296 Oil Counter-Shock

595 44. Ronald Reagan, Message, to the Congress Transmitting the National Energy Policy Plan, ,17July 1981, APP. Available at http://www.presidency.ucsb. 596 edu/ws/?pid¼ 44096 (accessed 26 July 2017). 597 45. Public Papers of the Presidents of the United States: Ronald Reagan, 1984 598 (Washington, DC, 1985); Paul R. Portney (ed.), Natural Resources and the Environment:The Reagan Approach (Washington, DC, 1984);Peter

599

Z. Grossman, US Energy Policy and the Pursuit of Failure (New York, 2013).

, 600 46. Campbell, The, Biopolitics of Security ,p.956. 601 47. Keith Bradsher, High and Mighty: The Dangerous Rise of the Suv (New York, 2002).

602 ,

48. Idem, p. 50. Quoted in Campbell, The, Biopolitics of Security ,p.957.

, 603 49. Fiona McLean, SUV, Advertising: Constructing Identities and Practices ,in 604 J. Conley and A. Tigar McLaren (eds), Car Troubles: Critical Studies of

Automobility and Auto-Mobility (Farnham, 2009), pp. 59– 76.

, 605 50. Campbell, The, Biopolitics of Security ,p.945. 606 51. Ibid., p. 958. 52. Ibid., p. 959. 607

53. Black, Crude Reality.

, , 608 54. StephenKroepp, Gr, idlock!Congestion on America sHighwaysand Runways , 609 Time,12September 1988. 610 611 612 613 614 615 616 617 618 619 620 621 622 623 624 625 626 627 OCS Part_5— 1/2/2018— NANDHINI.P— 571978— IBTauris

1 2 3 4 5 6 PART V 7 8 ENERGY ANDENVIRONMENTAL 9 10 CHALLENGES 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 OCS Part_5— 1/2/2018— NANDHINI.P— 571978— IBTauris

34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

1 2 3 4 5 6 15 7 8 9 10 TheRise of Environmentalist 11 Movementsand theDebateon 12 13 AlternativeSources of EnergyDuring 14 theOil Crisis in theUnitedStates 15 16 17 Angela Santese 18 19 Introduction 20

21 During the 1970s modern environmentalism rose around the world

22 leading to the, emergence of global-scale environmental anxieties and 23 awareness, and to thebirth of environmentalistcampaignsand 1

24 movements. Although the mobilising issues varied from place to 25 place, environmentalism arose as response to, the environmental

26 disruptions that came with pell-mell economic growth in the Age of , 2 27 Exuberance . In particular, the huge quantities of energy and materials 28 that had fuelled the postwar unprecedented economic growth and the

29 wastes and pollution generated in the process, together with oil spills and

30 accidents at nuclearand chemical plants, combined to, raise public 31 concerns about negative externalitiesofeconomic growth, ,highlighting 3 32 the increasing decay and devastation of the environment. From the 33 1970s, environmental concernsspread on aglobal scale leading to the OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

300 Oil Counter-Shock

34 creation of environmental campaigns, often characterised by NIMBY 35 style tactics of protest, and to the development of environmental policies 36 in both the United States and Europe. Although thesecampaigns had 37 frequently alocal connotation, contesting for example asingle chemical 38 or nuclear plant, they had at the same time atransnational dimension. 39 This latter element was related to the emerging awareness, shared 40 by protesters around the globe, that the world wasintegrated and 41 interdependent from the ecological viewpoint and that issues such as 42 population growth, energy consumption, industrial pollution and 43 resources depletion could not be addressed as national problems. 4 44 In theUnited States, thegenesisofthe modern environmental 45 movement canbelocatedinbetween the publication of Silent Spring 46 in 1962 (the popular book in whichbiologistRachelCarson exposed 47 thedamages produced by pesticidesbothonthe environment and 48 human health) andthe celebration of the ﬁ rst Earth Dayin1970. 5

49 This latter, promotedbythe Wisconsin SenatorGaylord Nelson,was

50 meanttoemphasise how ,theobsessionwithindustrial growthand 51 consumerism wasstrainingthe environment to thebreakingpoint, , 52 introducing manyAmericans to theproblem of thenegativeeffectof 53 human activities on theecosystem andthe possibledepletionof 54 naturalresources.6 Theyearbefore, in 1969, therewas anotherdecisive

55 moment forthe birth of theUSmodernenvironmentalmovement, the 56 SantaBarbara oil spill. Theaccident highlighted ,thedangerofoil

57 production and insuf ﬁ cient regulationofindustries with apotential 58 forenvironmentalthreats, ,helping to popularise theenvironmental 59 cause.7

60 Themountingconcern over theenvironment andpollution

61 intertwinedwith the energy crisis. The, historicevent mostcentral to

62 environmentalism – writes Robert Paehlke – wa, sthe energy price 63 shock of 1973 and 1979, . 8 The skyrocketing prices of oil were indeed 64 accompanied by fears about the likely depletion of natural resources.

65 In 1972 the Club of Rome published the study The Limits to Growth. 66 Based on computer modelling,itsuggested that if, the present growth OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

The Rise of Environmentalist Movements 301

67 trends in worldpopulation, industrialization,pollution, food production,

68 and resource depletion continued unchanged,the limits to growth on 69 this planetwill be reached sometime within the next one hundredyears, . 9 70 The study thushelped to broaden the debate on the negative effects of an 71 unrestricted economicgrowth and on the environmental consequences 72 of industrial systems characterised by high rate of energy consumption. 73 At the same time, focusing on the question of the future depletion of 74 natural resources, it amplifi ed concerns about the possible exhaustion of 75 oil reserves. 76 In the United States, during the oil crisis period,energy and the 77 environment, albeit sometimesinconfl icting ways, entered powerfully 78 the public discourse. The need to reduce the share of energy deriving 79 from oil led to the consideration of both conservation measures and 80 alternative energy sources. Different options to replace petroleum were 81 taken into account:hydro-electric power, coalgasifi cation, solar energy, 82 coalliquefaction,nuclear energy.While conservation measures and the 83 needtoobtain energy savingswere in line with the newfound 84 environmental awareness, nuclear power, relaunchedasaviableenergy 85 option by the oil crisis, collided with the concerns of the rising 86 environmentalist movementthat, since mid-1970s, was contesting the 87 construction of new nuclear powerplants,achieving aconsiderable 88 degree of public support.Startingwiththe oil crisis,the US 89 environmentalist movementbecameapolitical force strong enough to 90 infl uence the public debate on ecological concernsand to shape 91 environmental regulations. 92 This paper seeks to analyse the role of the US environmentalist 93 movement, looking in particularatMobilization for Survival, acoalition 94 of 49 peace organisations and environmentalist groups, in the discussion 95 aroused on the energy shortageand the potential substitutes for oil, 96 addressing some specifi cquestions.10 What was, if any, the role of the 97 new environmental awareness in the reduction of energy demand? Why 98 environmentalist activists chose as their target nuclear power instead of 99 equally polluting sources of energy like oil and coal? OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

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100 Converging on Conservation Measures: US 101 Governments, Movements and the Energy Crisis 102 The mergerofenergy needs and environmental concerns, presentedas 103 two interrelatedissues,had entered US political discourse before the 104 offi cial burst of the fi rst oil crisis. In June 1971, President Richard Nixon, 105 in sending the Congress the fi rst comprehensivemessage on energy

106 matters, spoke of his twin, goals of supplying adequate energy and

107 protecting the environment in the decades ahead, . 11 To deal with the 108 upward trendinoil pricesand avoid the possible fuels shortages 109 threatened during the previous winter, Nixonannounced aprogramme 110 to promote research and development for clean energy, to encourage 111 energy conservation anddevelop national shale oil resources. The

112 programme would have to ensure the, blessing of both ahigh-energy

113 civilization and abeautiful and healthyenvironment, . 12 114 After theoutbreak of theenergycrisis, on 7November1973, the

115

, President presented ,Project Independence intended to boost theuse of 116 alternative sourcesofenergyand conservation,inorder to meet the 117 energyneedsofthe country andreach independence fromforeign 118 energysources by theend of thedecade. 13 Although in that address 119 Nixonpaid attention to environmentalissues, these seemedsomehow 120 subordinatetoenergyneeds when he told that theproposed

121 legislation on energy ,would providethe necessary authority to relax 122 environmentalregulations on atemporary,case-by-case basis, thus 123 permitting an appropriate balancing of ourenvironmentalinterests, 124 whichall of us share, with ourenergyrequirements, which, of course,

125 areindispensable, . 14 126 The measuresplanned included efforts to convert power plants from 127 the use of oil to the use of coal, to encourage energy savingsand to speed 128 up the licensing and constructionofnuclear plants. Amongthe available 129 options, Nixon, as well as his successor Gerald Ford, saw in the further 130 development of nuclear poweraviable solution for tackling both the cost 131 of energy and the future exhaustion of fossil fuel. 15 In January 1975, 132 OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

The Rise of Environmentalist Movements 303

133 President Ford proposed his energy plan, which becamelaw as the 134 EnergyPolicy and Conservation Act in December of the same year.

135 The plan focused more on oil than energy in general, but still identiﬁ ed 136 some fuel efﬁ ciency measures and actions to speed, the development of

137 other domestic energy sources, such as coal, geothermal,solar and 138 nuclear power, . 16 139 Both Nixon and Ford had pinnedtheir hopes in anew technological

140 development of the nuclear industry,the liquid metal fast breeder 141 reactor. In June 1971 Nixon described the breeder reactor as our, best ,

142 hopetoday for meeting the Nation sgrowingdemand for economical 143 clean energy, ,while in August 1972, the chairmanofthe Atomic Energy 144 Commission,JamesR.Schlesinger, announced the building at Oak 145 Ridge, in Tennessee, of the ﬁ rst demonstration plant, the Clinch River 146 Breeder Reactor.17 147 Unlike his predecessors, Jimmy Carter wasmore cautiousonnuclear 148 powerand he would later oppose the breeder project. Nevertheless, 149 energy policy was his top priority on takingof ﬁ ce and, on 1March 1977, 150 he presentedCongress his proposed energy reorganisation legislation, 151 which createdthe Department of Energy(DOE) to record and regulate 152 energy use.18 On 18 April 1977,heannounced his energy plan based on

153 strict conservation, reneweduse of coaland renewable energy sources.

154 Carterunderlined that reducing energy deman, dthrough conservation

, ,

155 wasthe corne, rstone of his policy since conservation was the quickest, 156 cheapest, most practical source of energy, and away to solve at the same 157 timeenergy and environmental problems.19 While Nixon andFord had , 158 focused on increasingdomestic energy supplies, Carter sNational 159 Energy Planplacedgreater emphasis on reducingconsumption, , 160 changing consumers behaviour to decrease energy demand, implement- 161 ingconservation measures and developing alternativetechnologies to 162 produce energy. 20 163 The three administrationsthat since 1970 had to face the upward 164 trendinoil prices and then the ﬁ rst and the secondoil shock chose to 165 tackle theenergy problemwithstrategiesbased on amix of energy-saving OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

304 Oil Counter-Shock

166 measures,the revivalofnuclear powerand coal,and projects forthe 167 developmentofrenewable energy sources. 168 The environmental movementand the administrations, especially , 169 Carter s, agreed on themeasurestosaveenergy, through the 170 implementation of theconservationand energy-savingstandards 171 promoted by the DOE, and on the need to develop renewable sources. 172 Notwithstanding this convergence, the environmental movement, unlike 173 the White House,strongly opposed the stimulation of new domestic 174 energy supplies. 21 This dynamic can be explained by looking ﬁ rst at the 175 intellectual and cultural basis of modernenvironmentalism that was 176 rooted in acritique of economic growth,large-scale industrial complexes, 177 unrestrained consumerism and the role of scienceand technology in 178 supporting this kind of economicsystem. Forenvironmentalists 179 reducing energy consumptionwas not just apractical necessity, deriving , 180 from the needtoreduce the country sdependence on imported oil. It was 181 also away to promote anew paradigm of development that challenged 182 the idea of an ever-expanding consumerist society and unlimited 183 opportunities of economic growth. Secondly, each type of energy source 184 carried with it apotential for environmental danger and renewable 185 sources required time to be developed, while conservation was asafeand 186 quick wayto ﬁ ght against the energy shortages. This convergence 187 between the environmentalists and the governmentonthe need to , 188 develop conservation measures is evinced also by Ralph Nader s

189 testimony before the House Rules Committee: in 1975, the leading

190 environmentalisttold that withou, tadoubt the top priority for Congress

191 today should be saving energy because – he said – [this], is the quickest

192 new energy source we have, . 22 Like the environmental movement also

, 193 the, public generallyopposes new energy development and no energy 194 source can be considered popular.23 But unlike environmentalists, public 195 opinion was not an enthusiastic supporter of conservation measures that 196 actually affected moreindividuals than great corporations. Some of them 197 were indeed perceivedaslimitingtheir individual rights as both 198 consumers and citizens,makingmoreapparent the contradiction OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

The Rise of Environmentalist Movements 305

199 between the environment and the imperatives of economicgrowth and 200 consumerism. Nixonhimself, who had incisively contributed to the 201 environmental legislation and to the creation of the Environmental

202 Protection Agency(EPA), especially toward the end of his ﬁ rst term,

203 believed that his, pro-environment actions had yielded few political 204 dividends, ,underlying the unpopularity of measuresthat affected the 205 daily lifeofthe average American citizen.24

206 For Mobilitation for Survival s(MfS) activists instead a Sane, energy 207 policy, must be based on

208

209 astrong emphasis on conservation and renewable energy, since 210 these could provide, us with safe, renewable, non-inﬂ ationary 211 sources of energy; create thousands of jobs [ ... ]; begin the process 212 of converting our military, nuclear and oil-dependent economy to safe and socially useful production [ ... ].25 213

214 According to their perspective as, hift of national energy resources from 215 nuclear, coaland oil to renewable resources over aperiod of years would 216 contribute to our national security by ﬁ ghting inﬂ ation,providing

217 needed jobs, and removing aprime excuse for foreignintervention, . 26 218 Thus forenvironmentalists conservation measuresand the 219 development of renewable sourceswere the best options to address the 220 contingent problemofhigh energy pricesand to further, in the long 221 term, anew paradigm of economicdevelopment that it had to rely as 222 little as possible on fossil fuel.Despite this, and in asomewhat surprising 223 manner, the convergence betweenthe environmentalists and the 224 governmentwas not limited to conservation measures and alternative 225 sources but concerned also one of the possible substitutes for oil. 226 The two most obvious alternatives to petroleum were coal and 227 nuclear power. Both could potentially harm the environment: the ﬁ rst 228 one because of the effects of miningand of air pollution and carbon 229 dioxide producedbycoal burning; the secondone because of radiation 230 emission and the problems related to nuclearwastes disposal. Despite 231 OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

306 Oil Counter-Shock

232 that, the environmental movement considered coal as avalid transitional 233 alternativetosupply energy before developing renewable sourcesof ,

234 energy on acommercial scale. As stated in the movement spublication

235 reali, stically, over the next ten yearsthere is no option but to dependon

236 coal, . 27 They recognised the environmental hazards of coal mining and 237 burning but at the same time stressed that you, could increase the

238 amount [of coal] burnedand maintain or reduce total emission by

239 requiring older plants to install better pollution control technology, since

, 240 the, new coal technology promises to be environmentally better . 28 241 This confi dence in the possibilityofatechnological fi xtolessen the 242 environmental impact of coal was instead reversed in the case of nuclear 243 power. The last technological development in this fi eld, that is the 244 breeder reactor, requiring more fuel to be operated than the light water 245 reactor, was perceived as worsening the risks both for the environment 246 and for human health. 247 248 The Worst Possible Alternative: Nuclear Power 249 The fi rst protests against nuclear powerplants started before the energy 250 crisis. In particular, in California antinuclear power groups began to 251 criticise nuclearpower development at the end of the 1950s.The 252 organisationsinvolvedinthese earlycampaigns were basically 253 conservationist groupsworried not so much about the environmental 254 danger of nucleartechnology but ratherconcerned about the siting of 255 nuclear powerplants and their negative effects on pristinelandscapes. 256 For instance the Sierra Club, the most important conservationist 257 organisation, waspro-nuclear since it conceived nuclear power as clean 258 form of energy and as abest alternative to oil, since both petroleum 259 drilling and transportation could seriously harm the environment. 260 The shift in the tone of criticism againstnuclearpower came in the 261 1970s when concerns over radioactive contaminationreplaced those over 262 , landscape sdestruction. This change was alsosymbolised by the internal 263 confl ict within the SierraClub: in 1969, the former director David Bower 264 OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

The Rise of Environmentalist Movements 307

265 resigned to protestagainst the decision to build anuclearpowerplant at 266 Diablo Canyon,inCalifornia.Atthe same timehefounded Friends of 267 the Earth, aradical environmental organisation, whose agenda included 268 the antinuclearpower issue.29 In 1969 as well, at the Massachusetts 269 Institute of Technology, agroup of scientists and students formed the

270 UnionofConcerned Scientiststhat would later develop acampaign to

271 denounce nuclear power as a high, cost energy source with serious

, 272 unresolved safety problems which included the, risksofcatastrophic

273 nuclear plant accidents that could threatenthousands of people with 274 death and other nuclearradiation injuries, . 30 275 After Nixonand Ford decidedtorely on atomic power to 276 decrease the share of energyderiving from oil, nuclearpowerplants 277 becamethe target of notinmybackyard grass-root groups as well 278 as national antinuclearpowerorganisations. In 1976, theClamshell 279 Alliance, acoalition of small environmental andantinucleargroups of 280 NewEngland,begun to protest againstthe construction of anew , 281 reactoratSeabrook, in NewHampshire,occupyingthe construction s 282 site.Similar initiativesofprotest were developedinMaine, Connecti- , 283 cutand in theBoston sarea, whileother no-nukes organisations 284 were formed on themodel of theClamshell Alliance: theAbalone 285 Alliance to protest theDiablo Canyon power plantand theCatﬁ sh 286 Alliance, which brought together some antinucleargroups of the 287 southern States. 31 288 The assault against nuclear power developed in this period was based

289 on threesets of concerns: environmental hazards, safety-related issues

, 290 andthe so-called nu, clearconnection .Fromthe environmental 291 viewpoint, no-nukes activists saw adanger in the raw materials,basically

292 uranium and plutonium, needed to fuel the nuclearcycle. For antinuclear

293 groups all, methodsofuranium mining have serious environmental

294 hazards and uraniu, misradioactive,emitting alpha, beta and gamma

295 rays, ,thusexposing miners to the danger of law-emission radioactivity.32

296 Moreover, nuclea, rpower uses agreat deal of fresh water [ ... ]for 297 cooling, about 50 percent more than afossil fuel plant of the same size, . 33 OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

308 Oil Counter-Shock

298 The consequence of the process of cooling spent fuel was thermal

299 pollution that may, cause subtle, pervasive and permanent changes in the 300 ecosystems, . 34 The longlasting environmental hazard producedbythe 301 nuclear industry was that deriving from the spent fuel: according to 302 activists, the storage, processing and transportation of radioactive wastes, 303 which continued to emit radiations for hundreds of years, posed a 304 constant threat to both the environment and human health. 35 305 Moreover, antinucleargroups questioned as inadequatethe safety 306 standardsofnuclear reactors, theemergency procedures andthe plans

307 to evacuate thepopulation. Theirclaims were shared,and in someway

, 308 reinforced, by scientists charges that the ,basicsafety system in nuclear

309 plants hasnever been tested underrealconditionsand when tested 310 on small-scale models,consistentlyfailedtofunction properly , . 36 311 No-nukes denouncedalso theperilofradioactive contamination in 312 case of accident andits potential devastating medicalconsequences on 313 thepopulation, highlighting theimpossibility of containing thedanger 314 of theradioactive fallout. 315 With the development of the breeder technology the criticism of

316 nuclear powercametoinclude also the danger deriving from what no-

, 317 nukes activists labelled the, nuclearconnection .The breeder reactor was 318 designed to help the nuclearindustry to overcome the impending

319 shortage of uranium as nuclear fuel. As underlined in one of the analyses 320 of the breeder technology published by MfS the, breeder reactor would

321 use plutonium as fuel and would actually produce more plutonium than

322 it consumes, yieldinganalmostlimitless supply of fuel, .Inthat way, 323 this new kindofreactor wo, uld alsocontribute to the potential

324 proliferation of nuclearweaponsbyincreasing the amount of bomb fuel 325 in circulation, . 37 Unlike the light water reactor, the breeder reactor 326 producesatthe end of nuclearcycle morefuel than it consumes. 327 In particularthe result of its chain reaction is plutonium-239, aweapons- 328 grade ﬁ ssile materialsuitable for the production of nuclear bombs. Given 329 that characteristic, the breeder reactor erodedfrom atechnical viewpoint 330 theclear-cutseparation between thecommercial andmilitary OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

The Rise of Environmentalist Movements 309

331 applicationsofnuclearpower.According to activists this impliedthe 332 danger of horizontal nuclearproliferation since 333 334 one of the strongest link between nuclear weapons and nuclear 335 power concerns the relationship between the civilian nuclear 336 industry and worldwide proliferation of nuclear weapons. Simply 337 stated nuclear power plants spread both the technological know- how and the raw material needed to build atomic bombs.38 338 339 With the breeder technology, reactors started to be perceived as part of 340 the nuclearweapons production system and this led to the convergence 341 between the environmental and the antinuclear peace movement. For

342

manypaciﬁ st organisations indeed the goal, of nonproliferation of

343

, nuclear weapons became virtu, ally unattainable as longasthere [was] a

344 civilian nuclearpowerindustry, .Starting from that premise they choose 345

to join the antinuclear power struggle describing nuclearreactors as the

346

, silent, bombs . 39 347 Theconﬁ denceinthe nucleartechnologywas deﬁ nitely challenged by 348 theaccidentatthe nuclearreactor of ThreeMileIsland, in Pennsylvania. 349 On 28 March1979, because of aseries of technicalproblemsand human 350 mistakes,the core of reactornumber2wasseverelydamaged,causing a 351 leak of highly radioactivesubstances into theatmosphere. Thenear 352 meltdown of Harrisburg wasthe most seriousaccidentinthe historyofUS 353 commercial nuclearpower.Asunderlinedon TheBulletinofAtomic

354

Scientists it brought lo, ng-ignored reactors safety problems into sharp

355

, focus while th, eAmericanpublic, alongwiththe rest of theworld,was

356 treatedtoaquick course on what cangowrong with nuclearreactors , . 40

357 The accident caused what the Washington Post called an, emotional

358 fallout, ,with awave of protestsagainst nuclear powerthat was not 359 limitedonlytothe United States but also reached Europe.41 Especially in 360 Denmark and Sweden the accident led to adebate about the safety of 361 nuclear energy,while in Hannover, 35,000 people protested against the

362 project to build anuclear wastes dump with the slogan we, all live in 363 OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

310 Oil Counter-Shock 364 Pennsylvania, ,underlying the transnational nature of the nuclear

365 threat.42 In the United States, on 6May 1979, 200,000people protested

, 366 against nuclear power during the Mar, ch to Put Nuclear PoweronTrial , , 367 promoted by MfS. The rally sorganisers asked the shutting of all nuclear , 368 power plants,since, as showed by the Three Mile Island saccident, , 369 reactors securitysystemswere notabletoprevent radioactive ,

370 contamination.43 From the rally sstage,Ralph Nader urged President 371 Carter to keep the promises made during the 1976 campaign, namely , 372 that nuclearpowerwas to be the last resort and that energy conservation,

, 373 solar energy and clean coalwere fi rst resorts, in order to meet the nation 374 senergy needs.44 The accident clearly showed the environmental and 375 safety liabilities of nuclear power, leading to agrowthofthe antinuclear 376 activism around the country. 377 378 Shifting Paradigms? 379 Throughout the energy crisis, environmental organisations contributed 380 to the public discussiononthe ways to tackle the energy shortages and 381 the future depletion of fossil fuels. Environmentalists basically supported 382 the governmental effort to develop conservation and energy-effi ciency 383 , measuresand to change consumers habits in order to decrease energy 384 demand. They sustainedcoalpowerwith adequate pollution control 385 systems (as atransitional sourceofenergy before developing renewable 386 sources on acommercial scale) and alternativesources: the development 387 of solar, wind, thermal, biomass and hydro energy, the production of 388 methane and alcohol fuelsand changes in tax law to encourage and 389 subsidise the development of solar energy.45 Moreover differentstrands 390 of the environmental movement, together with pacifi st organisations, 391 strongly opposed nuclear power considered as the worstenergy 392 alternativesince it was dangerousfor boththe environment and human 393 health, expensiveand linked to military technology. 394 After the fi rst oil shock, the increase in the oil pricewas at fi rst 395 assumed to render nuclearenergy more competitivethan other fuelsand 396 OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

The Rise of Environmentalist Movements 311

397 thustoproduce an expansionofnuclearplant orders. As underlined by 398 Timothy Mitchell, the environmental movement by, insisting that 399 nuclear powergeneration be forcedtotake accountofthe risks of 400 accidents and the costs of disposing of spent fuel [ ....] helped make

401 nuclear energy less affordable,and thus less likely to becomealower- 402 priced alternative to fossil fuels, . 46 403 The accident at Three Mile Island, regarded by the environmentalists 404 as agraphic representation of the atomic danger,made things worse

405 for thenuclearindustry because public opinion lost con ﬁ dence

406 in nuclearpowerasasafe way to produce electricity.47 After, the

, 407 accident – the historianSamuel J. Walkerwrote – as, igniﬁ cant

408 percentage of Americansmoved from ambivalence to opposition in their

409 view on building more nuclear plants , . 48 Publicsupport for what in the

, 410 1950s was described by the government as our, friend the atom declined 411 in the 1970s probably due to the rise of environmental awareness and 412 antinuclearpower campaigns: in 1974, 59 per cent supported nuclear 413 power, while in January 1979,before Three Mile Island, only 50 percent 414 of the sample favoured building more nuclear plants. Of course,there 415 wasanother decline after the accident, when only39per cent of citizens 416 thought that increasing the share of energy deriving from nuclear power 417 wasagood idea.49 The near nuclear meltdown of Harrisburg in some 418 waymarked the end of the nuclearindustry in the United States since 419 there were no further nuclear plant ordersand utilities abandoned some 420 plants already underconstruction. 421 In addition to antinuclear powerprotests, economicfactorsalso 422 played an important role in the declineofthe nuclear powerindustry. 423 The high price of energy reducedelectricity demand growth and this led

424 to adrop of powerplant orders, bothcoal and nuclearpowered.50 As 425 underlined by Brendan Dooley the, drop in consumption of electricity as

426 aresult of the energy crisis was an ironic turn of events, reducing the 427 needfor new plants of any kind , .According to his analysis the economic 428 conditions of the mid-1970s were more signiﬁ cant than environmental 429 protests in undermining the nuclearindustry,and ThreeMile Island

. ver do seeme sures ea gm gy-savin ener nting mpleme ni to governmen the 462

and ts ntalis environme between ergence conv the and prevail to started 461

es pric oil lower 1983 Since over. as sw crisi gy ener the when reversed 460

was energy, ve sa to need the on emphasis the with together trend, This 459

. decrease demand energy he nt ei ol ar ed play also rowth cg economi of 458

path lower as and nergy fe eo pric high the other, the on but waste, avoid 457

and mption consu energy reduce to vement, mo ental environm the and 456

nt governme the both by ged encoura s, effort the ll ,a hand one the on from 455

: factors two least at to due as nw consumptio energy in ine ecl dd observe 454

year. per cent per 0.7 of average an to ropped nd consumptio The 453

gy ener of rate grow the 1981, and 1973 etween ,b cent per 3.8 of

, 452

energy total of mption consu the 73 – 1967 average an at growing was

, 451

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early the and shock oil rst ﬁ the ween Bet ion. direct that in actions 449

rst ﬁ the practice to in put ho nw ixo sN wa it although enure, st Carter 448

during lly especia crisis, energy the of re featu ent erman sap wa system 447

rgy ene suming high-con US the ge chan to order in sures mea saving 446

- energy and on conservati nt mpleme oi dt nee the on asis emph The 445

fall. to started prices 444

when apsed coll energy of rces ou es alternativ for cts proje high-cost many 443

ore Furtherm r. powe lear nuc against ggle stru the on instead focused 442

and issue, the on da gen ca ﬁ ci pe as advance not did tself ti movemen 441

ntal ironme env the terms, neral ge in es alternativ energy of ment develop 440

the of ortive supp ile wh over, More r. powe nuclear or fuel fossil 439

meager o et alternativ eal ar not ere sw source le renewab that, Given . 438

53 ,

ined rema ch resear for funding nt governme nd ,a place rket ma the 437

in pete com to ready yet not re we y the 1980s, early nd sa 1970 the in Nye

, 436

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captured energy, mal ther nd da win lar, so like urces, so wable Rene 434

plants new justify to . 433

52 ,

rgy ene or df deman enough not as ew ther se becau clining de dy alrea were

, 432

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... , 430

312 r-Shock Counte Oil

1/2/2018 — 5 r1 Chapte OCS HINI.P NAND — IBTauris — 79 5719 — OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

The Rise of Environmentalist Movements 313

463 While for the environmental movement, reducingenergy consumption 464 wasaway to further amore sustainable model of economic development 465 based on the elimination of wasteful energy practicesand on more 466 responsible consumer habits, for the government, and especially for 467 President Ronald Reagan, it was just an economiccontingent problem.

468 With lower energy priceand with thenewfoundemphasison

469 individualism, conservation measures started, to be seen as part of the 470 environmental agenda, rather than an economicimperative , and for this 471 reason they were abandoned.56

472 Indeed,whenReagantook ofﬁ ce he launchedwhathistorian

473 Samuel P. Hays haslabelled ,theReaganAntienvironmental 474 Revolution , ,tryingtorestrictthe environmentalpolicies implemented 475 in thepreviousdecade,cutting thebudget of theEPA andthreatening 476 to close theDOE. Theanti-environmentalattitudeofReaganwas 477 connected to hisanti-regulatoryand pro-business views,symbolised

478 alsobythe choice to appointAnne GorsuchasEPA administrator.

, 479 Gorsuch hada ,strongly pro-business politicalrecords andshe relaxed 480 theenvironmentallegislation limiting industrialdevelopments.But , 481 Reagan srigid anti-environmentalpostureback ﬁ red during his ﬁ rst 482 term,strengthening in some waysthe environmentalmovementand 483 legitimatingsomeofhis claims.Moreover, notwithstandinghis 484 rhetorical attack againstenvironmental legislation andconservation 485 measures, he didnot dismantle theDOE or eliminate speed limits, 486 showingapartialcontinuitywiththe policies implemented fromthe , 487 Nixon sadministrationonwards.57 488 489 Notes

490

1. John R. McNeill, The, Environment, Environmentalism, and International 491 Society in Long 1970s, ,inN.Ferguson, C. Maier, E. Manela and D. Sargent 492 (eds), The Shock of the Global: The 1970s in Perspectives (Cambridge, MA, 2010), pp. 263– 80: 263. 493

2. Ibid., p. 278.

, 494 3. Niall Ferguson, Introduction, ,inN.Ferguson, C. Maier, E. Manela and 495 D. Sargent (eds), The Shock,pp. 1 – 21: 14. OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

314 Oil Counter-Shock

496 4. On this seeMarco Armieroand Lise Sedrez (eds), AHistory of Environmentalism: Local Struggles, Global Histories (London, 2014). 497

5. On the rise of modern environmentalism and its relationship with the

, 498 conservation movement see Ian Tyrrell, Modern, Environmentalism ,in 499 J.-C. Agnew and R. Rosenzweig (eds), ACompanion to Post-1945 America (Malden, 2006), pp. 328– 42. On the Earth Day see Adam Rome, The Genius 500 of Earth Day: How a1970 Teach-in Unexpectedly Made the First Green 501 Generation (New York, 2013). On the role of Rachel Carson see Mark 502 H. Lytle, The Gentle Subversive: Rachel Carson, Silent Spring and the Rise of the Environmental Movement (New York, 2007). 503 6. Benjamin Kline, First Along theRiver. ABrief History of theUS 504 Environmental Movement (Lanham, 2007), pp. 81– 2. 505 7. Eric Smith, Energy, the Environment, and Public Opinion (Boulder, 2002), p. 3. 506 8. Rober Paehlke quoted in Smith, Energy, the Environment, and Public 507 Opinion, p. 3. 9. Donella H. Meadows, Dennis L. Meadows, Jorgen Randers and William 508 , W. Behrense, The Limits to Growth: AReport for the Club of Rome sProject 509 on the Predicament of Mankind (New York, 1972), p. 23. 510 10. Mobilization for Survival was established in Philadelphia in 1977 as an umbrella organisation created by the activists of peace and antinuclear power 511 groups in order to coordinate their efforts. It was amulti-issue organisation 512 that had four main goals: zero nuclear weapons; to ban nuclear power; to

513 stop the arms race; to fund human needs.

, 11. Richard Nixon: Special, Message to the Congress on Energy Resources , 514 4June1971, in UniversityofCaliforniaatSanta BarbaraAmericanPresidency 515 Project(APP).Available at http://www.presidency.ucsb.edu/ws/index.php? 516 pid ¼ 3038 (accessed1March2017).

12. Ibid.

517 13. Richard Nixon: Address, to the Nation About Policies To Deal With the 518 Energy Shortages , ,7November 1973, APP. Availableathttp://www.presidency. ucsb.edu/ws/index.php?pid¼ 4034 (accessed 1March 2017). 519 14. Ibid. 520 15. Timothy Mitchell, Carbon Democracy. Political Power in the Age of Oil

521 (London, 2011), pp. 191– 2.

, 16. Gerald R. Ford: Address, to the Nation on Energy and Economic Programs , 522 13 January1975, APP. Availableathttp://www.presidency.ucsb.edu/ws/? 523 pid ¼ 4916 (accessed1March2017);Francisco Parra, OilPolitics:AModern

524 HistoryofPetroleum (London, 2010), p. 253.

, 17. Richard Nixon: Special, Message to the Congress on Energy Resources ,

525 4June 1971, APP. Available at http://www.presidency.ucsb.edu/ws/index.

526 php?pid¼ 3038 (accessed 1March 2017); AC, ommercial Breeder Reactor to 527 Be Built With Aid of the T.V.A, ., New York Times, 8August 1972. 18. Kline, First Along the River,p.97. 528 OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

The Rise of Environmentalist Movements 315

, 529 19. Jimmy Carter: Address, to the Nation on Energy ,18April 1977, APP. Availableathttp://www.presidency.ucsb.edu/ws/?pid¼ 7369 (accessed1March 530 2017). 531 20. TerenceFehnerand Jack Holl, Department of Energy,1977 – 1994:ASummary History (Washington, DC,1994),p.21. 532 , 21. MichaelGraetz, The EndofEnergy: The Unmaking of America s 533 Environment, Security and Independence (Cambridge, MA, 2011), p. 54. 534 22. Ibid.

23. Smith, Energy, the Environment, and Public Opinion, p. 1.

535 , , 24. Jacob Hamblin, Ronald, Reagan sEnvironmental Legacy ,inA.Johns (ed.),

536 ACompanion to Ronald Reagan (Malden, 2015), p. 258.

537 25. Sane, Energy Policy , Survival Summer News,May 1980, Mobilization For

, 538 Survival Records – TAM 127, box 7, folder Survival, Summer, 1979– 1980 , The Tamiment Library and Robert F. Wagner Archives, New York (hereafter 539 TL).

540 26. Ibid.

, 27. Where, World is going on? , Survival Summer News,June 1980, Mobilization

541

For Survival Records – TAM 127, box 7, folder Survival, Summer, 1979– 542 1980, ,TL. 543 28. Ibid. 29. On the antinuclear power protests in California see Thomas Wellock, 544 Critical Masses: Opposition to Nuclear Power in California, 1958– 1978 545 (Madison, 1998); John Wills, Conservation Fallout: Nuclear Protests at 546 Diablo Canyon (Reno, 2006). On the history of the Sierra Club see Michael P. Cohen, The History of the Sierra Club, 1892– 1970 (San Francisco, 1988).

547 , , 30. Scientists, Declaration on Nuclear Power, Union of Concerned Scientists , 548 1975, SANE Records Series G, Folder TopicalFile/Nuclear Energy/ 549 Documents by Progressive Groups, 1976– 1981, Box 52, Swarthmore Peace Collection, Swarthmore PA (hereafter SPC).

550 31. No-Nukes News,Vol. 1, February 1978, Freeze Campaign Collected Records,

551 Folder Topical File/Local Activities, Box 1, SPC; CatFish, Alliance-Get Active or Radioactive, ,SANE Records Series G, Folder Topical File/Nuclear 552 , Opponents, Box 52, SPC. On the Seabrook scampaign see Henry F. Bedford, 553 Seabrook Station: Citizen Politics and Nuclear Power (Amherst,1990); Robert 554 Surburg Jr, Beyond Vietnam: The Politics of Protest in Massachusetts, 1974– 1990 (Amherst-Boston, 2009), pp. 54– 98. On the Abalone Alliance and the 555 Clamshell Alliance see Barbara L. Epstein, Political Protest and Cultural 556 Revolution: Nonviolent Direct Action in the 1970s and 1980s (Berkeley, 1991),

557 pp. 58– 124.

, 32. The, front end of nuclear fuel cycle: uranium mining and milling ,June 1980,

558 , MobilizationFor Survival Records – TAM127,box 1, folder Mi, scellaneous ,

559 1980,TL.

560 33. Nuclear, Power: ADanger to Peace and Freedom ,1979, Mobilization For

, Survival Records – TAM 127, box 1, folder Miscellaneous, ,1980, TL. 561 OCS Chapter15 — 1/2/2018— NANDHINI.P— 571979— IBTauris

316 Oil Counter-Shock

562 34. Ibid.

35. Ibid.

563

, , 36. Scientists, Declaration on Nuclear Power ,1975, SANE Records Series G, 564 Folder Topical File/Nuclear Energy/Documents by Progressive Groups,

565 1976– 1981, Box 52, (SPC).

, 37. Power, Plants and Weapons – The Nuclear Connection , The Mobilizer,

566

31 October 1978, Mobilization For Survival Records – TAM 127, box 1,

, 567 folder Miscellaneous, ,1980, TL. 568 38. Ibid. 39. Ibid.

569 , 40. Victor Gilinsky, The, Impact of Three Mile Island , Bulletin of the Atomic 570 Scientists 1(1980), pp. 18– 20. On the Three Mile Island accident see Samuel

571 Walker, Three Mile Island. ANuclear Crisis in Historical Perspective

,, , ,

(Berkeley, 2004); Mario Del Pero, , We Are All Harrisburg :Three Mile 572 Island and the Ultimate Indivisibility of the Atom, , RSA Journal 26 (2015),

573 pp. 143– 73.

, 41. Reaction, to Plant Mishap Spread Across Country , Washington Post,2April 574

1979.

, 575 42. Antinuclear, Activists Abroad Use US Accident to Support Cause , New York

576 Times,1April 1979.

43. Thousands, march on Washington DC against nuclear power ,Mobilization

577 ,

For Survival Records – TAM 127, box 2, folder May, 6coalition ,1979, TL.

578 44. Remarks, by Ralph Nader on the occasion of the gathering of citizens in

579 Washington DC, ,6May 1979, Mobilization For Survival Records – TAM

, 127, box 1, folder Miscellaneous, ,1979, TL.

580 ,

45. Nuclear, Power: ADanger to Peace and Freedom ,1979, Mobilization For

, 581 Survival Records – TAM 127, box 1, folder Miscellaneous, ,1980, TL. 582 46. Mitchell, Carbon Democracy,pp. 191– 2. 47. Anthony Baratta, Osif Bonnie and Thomas Conkling, TMI: 25 Years Later. 583 The Three Mile Island Nuclear Accident and its Impact (University Park, 584 2004), p. 84. 48. Walker, Three Mile Island, p. 243. 585

49. Smith, Energy, The Environment and Public Opinion, pp. 73– 4.

, 586 50. Gilinsky, The, Impact . 587 51. Brendan Dooley (ed.), Energy and Culture. Perspectives on the Power to Work (Aldershot, 2006), pp. 10– 11. 588 52. Baratta, Bonnie and Conkling, TMI: 25 Years Later,p.85. 589 53. David Nye, Consuming Power. ASocial History of American Energy (London, 590 1998), pp. 224– 5. 54. Parra, Oil Politics,p.250. 591 55. A.H. Taher, Energy. AGlobal Outlook: The Case for Effective Cooperation 592 (Oxford, 1982), p. 124.

56. Fiona Venn, The Oil Crisis (London, 2002), p. 140.

593 , , 57. Hamblin, Ronald, Reagan sEnvironmental Legacy ,pp. 257– 72. 594 OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

1 2 3 4 5 6 16 7 8 9 10 TheRoleofNuclearReactor 11 Technology on theDevelopment 12 13 of theNuclearIndustry and 14 Decision-making in theContext 15 of thePrice Fluctuations of the 16 17 1970s and1980s 18 19 20 Duncan Connors and Eshref Trushin 21 22 This paperfocuses on economicdecision-making in thenuclear 23 industry duringthe petroleum crisis of 1973and 1979 andthe 24 fall in oilpricesin1986. It will demonstratethatthe path takenby 25 countries such as theUnited Kingdom, theUnitedStates, Japan, 26 France andthe Soviet Union diverged dependingontheir

27 relationshipwiththe global petroleum marketand that theeventual 28 outcomes were not ,setinstone, butreliant on anumberof 29 dependentand independent factors based uponthe technicalchoice 30 of reactordesign used andhow different choices interactedwiththe 31 widereconomy. 32 33 OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

318 Oil Counter-Shock

34 Oil Price and Nuclear Weapons: Externalities and the 35 Choice of Nuclear Reactor Technology 36 Arguments about the role of oil price rises in determining the success or 37 failure of the global economy from 1973 emphasise the importance of 38 these events on the future energy choicesfor those nations employing or 39 developing nuclear power as afuture energy source for the nation. There 40 is much merit in this; for example, the United Kingdom was hit much

41 less than other Western nations by the 1973 Yom, Kippur, oil crisis due 42 to its already developed nuclear sector as well as areliance on domestic, 43 although expensive, coalsupplies that provided for around 73 per centof 44 electricity production.Compare this to the United States,France and 45 Japan which had 17 per cent, 40 per cent and72per cent of electricity 46 production accounted for by burning oil, then the United Kingdom 47 weathered the fuel crisisinterms of electricity supply better than its 48 peers, yet in terms of transport the country was hindered by imported oil 49 , the same as any other. And, of course,the miners strike of 1974 perhaps 50 had an even more crippling infl ationary effect on the United Kingdom 51 than the riseinoil prices had on other countries.1 The United Kingdom 52 did haveanearly adopter advantage by having an atomic power sector 53 intrinsically linked to the nuclear weaponsindustry with apower reactor 54 design evolved from the very fi rst British reactor (known as GLEEP)that 55 producedcopious amounts of plutonium for weapons use. 2 France and 56 the UnitedStates developed anuclearpower industry later than the 57 United Kingdom,based upon simplifi ed commercialdesigns originating 58 in the United Statesthat were eventually adopted by both nations, 59 although bothFranceand the United States initially pursued apath 60 similar to that of the United Kingdom based on reactors linked to nuclear 61 weapon production.3 The SovietUnion, again, had apath similar to that 62 of other nuclear weapon states in building plutonium-producing reactors 63 and following this with power reactors;but the Soviet Union is uniquein 64 that its technological approachcontinued to use avariety of reactors not 65 just for militaryapplications but also for amassive programme of nuclear 66 OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

The RoleofNuclearReactor Technology 319

67 electricity production starting in the 1970s.This paper will focuson 68 the Sovietprogramme as,whilst the creation of the Soviet nuclear 69 programme appears to follow the same path as other nations, it appears 70 to do so for other reasons. The SovietUnion was the largest exporter of 71 crude oil and natural gas for most of the twentiethcentury and the 72 petroleum industry was the main source of hard currency for the Soviet 73 economy. Consequently, the fate of itseconomywas intertwinedwith 74 the global oilpriceand, whilst this was to the national advantage after 75 1973, during the oil glut of 1986 and subsequent two-thirdsdrop in the 76 priceofoil the Soviet economy was severely hampered by the fall in 77 revenue from oil and gas exports.4 This paper will outline thesetrends in 78 comparison to the threenuclearoriginator nations of France, the United 79 Kingdom and the United States,aswell as Japan (beinghighlyreliant on 80 imported fuel and therefore price shocks)toshow that the nuclear path 81 taken by the Soviets was designed to increase oil and gas exports by 82 reducing home consumption.5 The goal wasnot just to increase revenue 83 and income – the use of oiland gas exports was an important prop to 84 maintain Soviet infl uence in Eastern Europe.6 85 Before continuing, the issue of reactor technology must briefl ybe 86 touched upon and two concepts will be introduced – moderation and 87 cooling. Moderationiswhat makes the reactor stable whilst at the same 88 timepromoting the reaction to fl ourish.Two substances havebeen used, 89 graphite and light or heavy water. Graphite producesthe best effect but 90 onlyworks with what is known as natural uraniumthat can very easily be 91 converted into weapons-grade plutonium and so as amoderator is 92 frowned up by non-proliferationregimes.This has restricted the export 93 potential of the UK-designed Magnox reactor and its evolution, the 94 Advanced Gas Reactor (AGR), that have reliably provided electricity for 95 overhalf acentury and yet have serious proliferation concerns from its 96 by-product, plutonium.7 Light water (i.e. normal water) is the preferred 97 moderation but it is not as effective as graphite and so requires fuel that 98 has been enriched with higher isotopes of uranium, with the advantage 99 that by burningupthese isotopes it produceslittle plutonium as waste. OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

320 Oil Counter-Shock

100 Heavy water functions as amiddle way betweenthe two and it gains its 101 name from having aheavy form of hydrogen called deuteriumthat 102 enhances the chain reactor. Whilst it is not as proliferating as graphite, it 103 still causes concern (the Canadian CANDU reactor formed the basis of 104 the Indiannuclear weaponsprogramme)and heavy water is avery 105 expensivesubstancetomanufacture. 106 Cooling is less of an issue as the majority of reactors in service use 107 light water, and whilst afew British reactors still use carbondioxideto 108 cool the reactor core to transferheat to the generators via an exchanger, 109 the use of lightwater as both moderator and coolantled to the creation of 110 two ubiquitousreactorsdeveloped by private US companies (that 111 received vast amounts of funding from the US military to develop power 112 reactors),the Pressurised Water Reactor (PWR) and the Boiling Water 113 Reactor (BWR).8 Sponsored by the US Navy for submarine propulsion 114 and US Army to powerremote bases, the two reactors designs beneﬁ ted 115 from being simple and cheap to build and were sold by Westinghouse 116 (PWR) and GE (BWR) in the hundreds using the commercial prowess of 117 both ﬁ rms backed up by the US government. No other design has fared 118 as well against this sales onslaught and whilst the Canadian CANDU 119 design which uses heavy water as amoderator has been amild export 120 success with adozen sold overseas, designs such as the British MAGNOX 121 and Advanced Gas Cooled Reactor (AGR) reactors failed miserably to 122 gain favour overseas baring two reactors sold to Japan and Italy, the latter 123 being part of the Italian efforts to develop anuclearweapon in the 1950s 124 and 1960s.9 Indeed, the British designs also required almost immediate 125 fuel reprocessing as the magnesium-encrusted fuel quickly corroded and 126 the plutonium content needed to be extracted as soon as practicable. 127 Efforts were made to use this plutonium to produce electricity in 128 technically complex Fast and Fast BreederReactors that operated at a 129 higher temperature and fuel densitythan conventional reactors, but due 130 to safety concerns over the use of plutonium and the use of unstable 131 elements such as sodiumfor cooling few everoperated at full capacity or 132 for that long.10 Mostly this was due to the need for adense coolantsuch OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

The RoleofNuclearReactor Technology 321

133 as sodium that created additional technicalproblems alongsidethose of 134 containing thehighlyradioactiveplutonium fuel.Barring some 135 experimental plantsthat functioned for aroundadecade, such as 136 Dounreay in Scotland, Phenix in France and the Fast Flux Test Facility in 137 the United States the technology has not been mastered. Indeed, the one 138 attempt to create afully functioning commercialfast breeder reactor, the 139 one gw Franco-Swiss Super Phenix reactor, wasanabject failure and was 140 decommissioned after producingonly 63 months of electricity at less 141 than 25 per cent capacity over an 11-year period between 1986and 142 1997.11 There is, however, an outlier in all this which is the Russian BN- 143 600 fast reactor,which has operated relatively reliably (whilst being 144 somewhat leaky in terms of sodiumnow and again) since 1981.This 145 reactor has demonstrated that alternative nucleartechnologies can work 146 and its sister power plant, the BN-800 is currently in commission after 147 achieving criticality in 2014. 12 148 Some arguethatthe PWRand BWRtechnology developed in the 149 United States during the1950s hasbecome theorthodoxy througha 150 process of technicallock-in similartothatofthe Otto Cycle engine

151 used in themajority of automobiles to thepresent day.13 There is, , , 152 perhaps, somemeritinthisinthe context of successful non-orthodox 153 systems such as theBritish and Canadian designs, butthe fact remains 154 that thesimpli ﬁ ed American designsrequiring no reprocessing 155 (the used fuel wasstored)and with few, if any, proliferation concerns 156 provided an easy cost-effective route to nuclearpower production.The 157 strong relativemerits of thelight water designscan be seen in its 158 adoption in anumberofnationsbefore andafterthe 1973 oilcrisis – 159 countriessuchasSwedenand Switzerlandabandoned mature domestic 160 designsinfavourofthe BoilingWater Reactordesignaround1970, 161 particularly as thenew Non-ProliferationTreaty ﬁ nallyforcedmanysmall 162 to medium nationswithnuclear ambitionstoclose weaponsprogrammes 163 down with theconsequence they wouldhavetodothe same fortheir local

164 plutonium-producingreactors.14 Finally, indigenous reactordesignwas , , 165 dealtadeathblowbythe French MessmerPlan of 1974 (named afterits OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

322 Oil Counter-Shock

166 main advocate,Prime Minister Pierre Messmer) designed to reduce the , 167 country sdependenceonimportedhydrocarbons. Theplanspeciﬁ ed a 168 massiveexpansionofnuclear powerusing American PressurisedWater 169 Reactortechnologyasaneasiertobuild alternativetothe indigenous 170 UNGG reactors andthe United Kingdomfollowedsuitin1978, 171 abandoning both itsAGR technology as well as adomesticallydeveloped 172 SteamGeneratingHeavy WaterReactor (SGHWR)infavourofthe PWR. 173 In short, reactortechnologyinthe global nuclearindustryhad become 174 relatively homogeneousbythe mid-1980s.15 175 Soviet technicaldevelopments on the one hand followed avery 176 similar path to that of France, the United Kingdom and the United States 177 in that the earliest reactors were graphite moderatedand used natural 178 uranium to produce plutonium for bombs.16 As with the United States, 179 the Soviet Unionalso developed aprogramme of PressurisedWater 180 Reactors based upon submarine technology akin to those of the United 181 States in what appears to be aprogramme of parallelevolution; and these 182 reactors, known as the VVER (Vodo-Vodyanoi EnergeticheskyReaktor/ 183 Water-Water Power Reactor or in Russian Водо- водяной энергетичес- 184 кий реактор)were the earliest types employed by the Russian nuclear 185 industry in the 1960s and 1970s. Then, something interesting happened 186 in the early 1970s that provides acounterfactual for the academic but for 187 the average atomic engineer something counterintuitive and against the

188 orthodoxy – the SovietUnionswitched to producing both the VVER , , 189 PWR reactor but alsoa new design based upon the early graphite 190 moderatedplutonium reactors, which was called the RBMK (Reaktor 191 Bolshoy Moshchnosti Kanalnyy/High PowerChannel-type Reactor – 192 Реактор Большой Мощности Канальный).17 The latter design, known 193 as the RBMK, was ﬁ rst brought into service at the Leningrad Nuclear 194 Power plant and this reactor type was symbolic with the Soviet 195 obsessionwith gigantism, being substantially larger than the VVER 196 reactor not only in its monolithic size, but alsopotential electrical 197 outputs of up to two and ahalf gw. The majority of sourcesstate that the 198 RBMK was more expensivetobuild than the VVER, more complex to OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

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199 run and requiredmore staff; but there was one major advantage – it 200 waseasier to build in large numbers being made up of prefabricated 201 blocks brought in straightfrom the factory anderected on aprepared 202 site. Additionally,the reactor could run on natural uraniumand 203 produce plutonium and was therefore integral to the Soviet ambition of 204 operating a fl eet of conventional and fast breeder reactors,one of the 205 few nationswho have partially succeeded in doing so with the BN-350 206 and BN-600 designs.18 207 Technicalchoiceistherefore an importantconsideration when 208 analysingthe economic prospectsofthe global nuclearindustry. TheLight 209 WaterReactor represents theorthodoxy butnations that pursuednuclear 210 weaponsprogrammesused, foraperiodoftime, graphite or heavywater 211 moderatedreactorsthatevolved from earlyresearchreactors. These 212 reactors have very differentoperational characteristics, construction costs 213 andpricesfor electricitywhencomparedtolightwater designsaswellasa 214 tendency to produceplutoniumwaste.France, theUnitedKingdom and 215 Soviet Unionemployedsuchplantscommerciallytosomesuccess and, 216 whilst France movedontousing thecheaper andmorereliablePWR 217 design afterthe 1973 oilcrisis, theUnitedKingdom andUSSRcontinued 218 to employ graphite-based plants.Inthe case of theUnitedKingdom it was 219 becauseacrashprogramme from the1950s andacontinuing evolved 220 programmerunning into the1970s createdthe largestnuclear industryin 221 termsofoutput andpercentageofoverall production until1971whenthe 222 United States surpassedthe United Kingdomasitcooledits healsafter two 223 decadesofalmostbreakneck reactorconstruction. In thecaseofthe Soviet 224 Union, however, it certainlyappears that whilst theVVERreactor wasthe 225 better technology theRBMKcould be made quicklyand wastherefore 226 used to bringabout amassive expansionofnuclear powerwithan 227 additional benefi tofmakingplutonium forthe ongoingfastbreeder 228 programme. Thefollowing sectionwillanalysisthe costsofreactorsand 229 thegrowthofthe national industries namedinthispaper in termsofthe 230 relationship betweentheir energy needsand the fl uctuating cost of crude 231 oilinthe 1970s and1980s. OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

324 Oil Counter-Shock

232 The Economics of Nuclear Power 233 This section will give abriefoverview of the economics of using nuclear 234 powerfor electric generation.Itwill (attemptto) show the business case 235 for an item of machinerythat produces an outputattimes more 236 expensive than otherfuels and requires an initial capitalspend 237 substantiallyhigher perkilowatt/hour(kw/h) thanthe fossil fuel 238 alternative,although maybe not for the renewableoptions. 19 Nuclear 239 reactors of anytype arelarge infrastructure projects thatare in part 240 standardised, partbespoke and take asubstantialtime to construct; 241 the global average is approximately ﬁ ve yearsfrom start to ﬁ nish, 242 , with Japan saverage almost ayear lower andthe UnitedKingdom 243 taking morethan twice as long.20 Thecost of constructing the reactors 244 and associated lifetimecosts also variesacrossnationsand it appears 245 that economiesofscale arepartofthe process and as Figure16.1 246 demonstrates, follow aU-shaped inverted bell curve. 247 Therefore, whilst nuclear powerisexpensive and along-term 248 proposition susceptible to political and environmental concerns, the 249 60-year or more proposed lifespan has the potential to provide an 250 investor returns over generations. Indeed, plants constructedinthe 251 1960s and 1970s are still in operation and are expected to continuein 252 commercial service for up to 20 years.21 253 254 255 256 257 258 259 260 261 262

263 Figure 16.1 Cost of construction of reactors and associated lifetime 264 costs over time. OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

The RoleofNuclearReactor Technology 325

265 Table 16.1 Cost comparison between nuclear reactors and CCGT 266 Cost Per mw/h Nuclear CCGT 267 Construction Capital 65 – 80% 20 – 30% 268 Lifetime Maintenance 10 – 20% 5 – 10%

269 Fuel 5 – 10% 60 – 80% 270 Source: Fabien Roques et al., Nuclear, Power: AHedge against Uncertain Gas and , 271 Carbon Prices , The Energy Journal xxvii/4 (2006), pp. 1 – 23. 272 273 The genuine advantage for anuclearreactor comes with fuel costs, 274 which are substantially lower over its lifetime than acomparable fossil 275 fuel plant, as Table16.1 demonstrates in comparison with aCombined 276 Cycle Gas Turbine (CCGT) power station.

277 The fuel costs are the important attraction of nuclear powerand do 278 not suffer from the same price fl uctuations caused by events, as , 279 externalities that affect gas and crude oil prices.However,these fuel 22 280 costs are alsotechnology specifi cand dependonreactor type. 281 Thebig drawbackfor new reactorconstruction (particularlyin 282 recentyears)eveninthe 1960s and1970s wasthe need forupfront 283 capital. Whilst in theUnited Kingdom, France andthe Soviet Union 284 this was lessofanissueaselectricity generation wasanationalised 285 state enterprise, in theUnited States new reactors werefor themost 286 plantfundedbyprivate utilitiesentering favourable arrangements 287 with Westinghouseand GeneralElectricthatreassured fi nancial 288 institutions. Nevertheless, therewas additional Federal involvement 289 in theindustryinthe fi eldofreactorresearchand development that 290 enabled both Westinghouseand General Electrictodevelop large 291 commercialreactors without passing thecostonto thecustomer. 292 What is also worthy of note is thefactthatother energysources 293 receivedmoresubsidy than nuclearpower – between 1950 and 294 2010 theFederal Government spent over $837 billioninsupporting 295 theUSenergy market and yet, whilst 44 percent of this wentonoil, 296 21 percent on renewables and12per cent on coal,only 9per cent 23 297 went on nuclearpower. OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

326 Oil Counter-Shock

298 The attractionofnuclearpower is therefore not foundinshort-term 299 operations nor as areaction to an event, suchasafuel crisiscaused 300 by asudden price rise, that might very well haveonlybeen apassing 301 phenomenon reversed in the followingdays, weeks,months and years, 302 but as areliable wayofproviding baseload electricity at areasonable 303 cost. Andyet, when analysing the steadynumber of reactor orders in the 304 United States since 1960 and the massive rise after 1973 with 41 reactors 305 ordered in 1974, it is substantially correct to state this was areaction 306 to the rise in oil pricesand an assumption that OPEC would not 307 change its direction anytime soon. Indeed, amplifi ed by awide-ranging 308 concern about price rises dating back to the mid-1960s and the effects 309 of the closureofthe Suez Canal in 1967 with the subsequent risein 310 transportation costs added to an awareness of scarcity, then aprompt 311 reaction to the 1973crisis makessense.24 312 In short, despite nuclearpower being useful as abaseloadasopposed 313 to meeting fl uctuations in demand, concerns about future energy security 314 and the cost of energy infl uenced the fl ood of American reactor ordersin 315 the 1970s. 316 France was another example of arush to nuclearpowergeneration 317 that started in the 1950s and onethat continued after the Three Mile 318 Island accident in 1979 halted further reactor orders in the United , 319 States.25 Prime MinisterPierre Messmer splan for the adoption of 320 nuclear power based on Light Water Reactor technology to provide the 321 majority of electricity in France is well known and contrasts with the 322 commercial approach undertaken in the United States but also with 323 the other state-owned, managed and controlled industries in the United 324 Kingdom and the USSR. In 1973,the United Kingdom had amature 325 nuclear industry and ample supplies of coal and therefore was unlikely to 326 respond in the same way as the United StatesorFrance; but the outlier 327 and counterfactual case is that of the SovietUnion. The USSR could only 328 benefi tfrom the OPEC price rise, as it was the largest exporter of crude 329 oil and natural gas and therefore energy self-suffi cient, which asksthe 330 question, why did the Soviet Unionmassively expand its nuclear sector OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

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331 after 1973? The short answer is it wasnot areaction but awell laid-out 332 plan:the Sovietplanning systemlaid out goals for major infrastructure 333 projects well in advance using its systemofeconomic fi ve-year plans. The 334 nuclear industry was part of this and so it wasthe Ninth Ten-Year Plan 335 starting in 1970 that initiated amassive expansionofnuclear power. 336 With the TenthFive-Year plan due to commence in 1975, it seems 337 logical that it was adocument refl ectiveofthe post 1973 riseinoil 338 prices.26 The Sovieteconomy evolved over the following 15 years to 339 becomereliant on its energy sector for hard currency and, by 1987, 340 almost half of all Soviet exports were accounted for by the energy sector 341 at 46.5 per cent of all exports by value.27 There is an argument that this 342 would be due to supporting economies in COMECON (also known 343 as CMEA, Council for Mutual Economic Assistance) but in reality 344 over80per cent of the energy exports went to Westernnations.28 It is 345 conceivable, therefore, that the Soviet Unionisanexceptional case 346 compared to other nationsbyimplementing anuclear programme to 347 replace fossil fuelstoincreasethe size of oil and gas exports as opposed to 348 replace energy imports from abroad.29 349 350 The Nuclear Reaction to the 1973 OPEC Crisis by 351 Industrialised Nations 352 This section will perform aquick overview of the availabledata for a 353 period of 18 years from 1970 to 1988 to show how fi ve nations, France, 354 Japan, the United Kingdom,the United Statesand the SovietUnion 355 responded to both the 1973 OPEC oilcrisis but also the fall in crude oil 356 prices in 1986. The SovietUnionwarrants particularattention as in 357 manyways it is the exception that proves the rule by being anet exporter 358 of energy and yet anation that underwent alarge expansionofnuclear 359 power alongsideother nationsfromthe early1970s onwards. 360 Hypothetically,this would be to benefi tfrom the rise in oil pricesto 361 improvethe Soviet current account balance; access to hard currencywas 362 always an issue for the national economy over the 74-year existence of 363 OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

328 Oil Counter-Shock

364 the Soviet Unionand the fate of the Soviet ruble was linked to British 365 pound with which it was pegged.30 Indeed, as previously mentioned the 366 vast energy exports of the Soviet Union accounted for almost 50 per cent 367 of the national export revenue by the mid-1980s. Any programme to 368 improve this would be at the forefrontofthe mind of GOSPLAN 369 when setting fi ve-year plans and again, the Ninth and Tenth plans 370 both outlinedplans for amassive expansionofnuclearpower in the 371 Europeanand Central areas of Russia and the Ukraine. The openingof 372 35 gigawatts (gw) of nuclearpower between 1970and 1988and plans for 373 afurther 40 gw by 1990 refl ected this, but manystations stood 374 uncompletedbythe early 1990s as the Chernobyl accident ended the 375 development of the RMBK reactor and awaning economy could no 376 longer afford the VVER design.31 377 The effects of boththe OPEC crisisand the counter-shock on the fi ve 378 nations studied in this section areapparent in the two charts below. 379 However, the United Kingdom grewatamuch slower pacethan other 380 381 382 383 384 385 386 387 388 389 390 391 392 393 Figure 16.2 Proportion of electricity production by nuclear power in fi ve countries, 1970 – 88. Source: IAEA, IEA and USA/USSRFacts and 394 Figures, US Economicsand Statistics Administration and State 395 Committee on Statistics,1991and Soviet EnergyData Resource 396 Handbook, Central Intelligence Agency, 1990. OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

The RoleofNuclearReactor Technology 329

397 398 399 400 401 402 403 404 405 406 407 408 409 Figure16.3 Output of nuclearindustryinthousandKTOES in ﬁ ve countries, 1970– 88.Source: IAEA,IEA andUSA/USSRFactsand Figures, 410 US Economicsand Statistics Administration andState Committeeon 411 Statistics,1991and Soviet Energy Data Resource Handbook,Central 412 Intelligence Agency,1990. 413 414 415 416 417 418 419 420 421 422 423 424 425 426 Figure16.4 Energy balance in thousandKTOESin ﬁ ve countries, 427 1970 – 88. Source: IEA, OECD and Soviet EnergyData Resource 428 Handbook, Central Intelligence Agency, 1990. 429 OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

330 Oil Counter-Shock

430 nations despite being an early adopter of nuclear powergeneration, and 431 levels out at approximately 20 per cent nuclearpowergeneration as a 432 proportion of electricityproduction. 433 Figures 16.2 and 16.3 charts demonstrate that the major industrial 434 economies decided to wean themselves off imported fuel and work to a 435 new reality for fuel supply. However, the Figure 16.4shows adifferent 436 narrative,that some nations continued to increasetheir energy imports, 437 that the UnitedKingdom switchedtobecomeanew energy exporter and 438 that the SovietUnionaspreviously mentioned was and remained alarge 439 global supplier of crude oil and natural gas. 440 To determinewhether theSovietUnion as anet energy exporter hada 441 different relationship with theglobalmarket, we performedavery simple 442 Ordinary LeastSquares regression over the18-year period between1970 443 and1988for the fi ve countries,using Japanasacomparatorbecause of its 444 symbioticrelationshipwiththe market foroil andgas. 32 445 The regressionestablished the responsiveness of the fi ve nationsto 446 fl uctuations in the price of crude oil using the proportion of nuclear 447 power as the dependent variableand the changes in the price of Arab 448 light, energyexports, totalelectricity production, the proportion 449 generated by fossil fuelsand the proportion generated by hydro 450 (excluding pumped storage) and, fi nally, dummy variables for graphite 451 and water based reactors. Unsurprisingly all nationsdemonstrated alevel 452 of responses to oilprices, with theUnitedStates andJapan 453 demonstrating ahighly elastic relationship with the price of oil each 454 with an approximate 0.7 per cent growthinnuclearpower for every 1per 455 cent riseinoil price, with the United Kingdom being the opposite in this 456 period by showingalow elasticity. Interestingly, the nuclearoutput of 457 France and the SovietUnion, with both havinga0.41 per centrisein 458 nuclear output per 1per cent rise in pricedappeared to be less responsive 459 to oil prices than the United States and Japan even though the 460 conventional narrative states that both nationswent all out in building 461 nuclear reactorsfrom the mid-1970s onwards. This is not, however, a 462 ground-breaking counterfactual but ratherare fl ection of the planned OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

The RoleofNuclearReactor Technology 331

463 system of astate-owned electricity sector that does not respond to price 464 immediately but rather sets out andexecutes agoal without recourse to 465 market forces. The regressionalso demonstrated that the SovietUnion 466 with its positive energy balancehad adifferent relationship with the oil 467 priceand exports when it came to nuclear power, energy and the priceof 468 oil and, yet, it still followed the samepath as the other nationsbut for 469 verydifferentreasons; its abundance of energy resources was asource of 470 economic and diplomatic prowessand nuclear powerreinforcedthis. 471 Overall, the technological dummy wasundramatic showing that water 472 reactors increased output by approximately1per cent per annum, which 473 is mildlysignifi cant in the longterm and perhaps are fl ection of the effect 474 of the burgeoning environmental movement in Westernnations.33 475 TheOLS modeldescribesthe relationshipbetween oilprice,national 476 energybalances andthe developmentofthe nuclearsector.However, for 477 thepurposesofthispaper it is merelyapointer to furtherworkonthe 478 longer-term consequences of 1973 and1986 notonlyonthe Soviet nuclear 479 sectorbut also,moreimportantly,onthe affect thesetwo eventshad on the 480 Soviet exports,currentaccountbalance andstate budget usingoveramuch 481 longer term,from1945to1991. Thegoalistosee howmuchthe Soviet 482 state lost in revenue in 1985 and1986 to seehow much thegovernment 483 hadtoborrowand repaytosee howthiscontributed to thedemiseofthe 484 USSRinDecember1991. Lookingatthe ordinary,unprocessed data,we 485 cansee atrend towardshigherexpenditure on debt in aperiod of falling 486 income forthe Soviet Union after 1986 whichispotentially avery 487 important factor in theeventual demise of theUSSR. 488 This paper has emphasisedthat nuclear powerand the global energy 489 market for hydrocarbons haveasymbiotic relationship but thatitisnot a 490 simple one of comparingthe supply and demand of one product against 491 another. The technology behind nuclear wasfor the fi rst periodof 492 the industry highly diverseand based upondifferent designs using 493 different materials in nations that started the nuclear adventurewiththe 494 goalofproducing nuclear weapons. In this environment,plutonium was 495 the output; electricity was the by-product, and early nuclear power OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

332 Oil Counter-Shock , , 496 industries in these originator nations were based uponinef fi cient 497 graphite moderated designs. The UnitedStates, however, followed apath 498 through military spendingtodevelop water based power reactors and 499 this becamethe ubiquitousdesign after allnations, barring the United 500 Kingdom, abandoned graphite reactors as too costlyand withan 501 associated proliferation risk.Thiswas despitethe potential for 502 plutonium as fuel in afast breeder reactor, which has never worked as 503 atechnologyinany nation otherthanthe SovietUnion (and later Russia) 504 and as atechnology has made little impact on theindustry.The Soviet 505 Unionhad provided acounterfactual account in this paper due to itsgoal 506 of creating asubstantialnuclear industry whilstalsobeing energy 507 independentand amajor exporterofcrude oil and naturalgas. Indeed, 508 its choiceofamodular graphite reactor in the 1970s when nations such 509 as France adopted the light water reactor wholesale is are fl ection of this 510 as the USSRwantedtobuild aseries of complimentary uranium-burning 511 but plutonium-creating reactors feeding a fl eet of fast breeder reactors. 512 This paper put forwardthat the Soviet Unionbuilt its nuclear energy 513 sectortostop burning petroleum, gas and coallocallytoincrease its 514 exports of hydrocarbons for hard currency in atime of rising oil prices. 515 In the data the growth in the atomic industry is apparent and whilst it is 516 not as responsive to priceassay Japan and the UnitedStates, this is 517 refl ective of anon-market-based stateplanning system (theresults for 518 France are analogoustothis) based on fi ve-yearplansthat constrained 519 the responseofthe nation to theseevents.This research is moving 520 forwardtostudy the effect of 1973 and 1986onthe Sovietstate budget to 521 determine whetherits reliance on energy exports made the country 522 particularly vulnerabletobothexternal andasymmetric events. 523 524 Notes

525 1. Jingwen Fan, Patrick Minford and Zhirong Ou, The, role of fi scal policy in , , 526 Britain sGreat Infl ation , Economic Modelling 58 (2016), pp. 203– 18. 2. For the development of nuclear power in the United Kingdom in particular, 527 , see Margaret Gowing sof fi cial histories: Margaret Gowing, Independence 528 OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

The RoleofNuclearReactor Technology 333

529 and Deterrence: Britain and Atomic Energy, 1945– 52 (London, 1974); and Id., Britain and Atomic Energy 1939– 45 (Basingstoke, 2001). Also: H.M. 530 Stationery Ofﬁ ce, Nuclear Energy in Britain (London, 1976); UK Atomic , 531 Energy Authority Historian sOf ﬁ ce, The Development of Atomic Energy: 532 AChronology of Events 1939– 1978 (Oxford, 1979); Walt Patterson, Going Critical (London, 1985); and Roger Williams, The Nuclear Power Decisions 533 (London, 1980). 534 3. The most comprehensive and informative book on the development of 535 nuclear power in France is Gabrielle Hecht, The Radiance of France: Nuclear Power and National Identity after World War II (Cambridge, MA, 2009). , 536 4. See Olga Skorokhodova scontribution to this book. 537 5. Asimilar path was proposed and partially executed in Mexico, see Jean-

, , , 538 Pierre Angelier, Le, secteur de l énergie au Mexique , Problemes D Amérique Latine 52 (1979), pp. 105– 45.

, 539 6. R.D. Kase, Petroleum, Perestroika , Columbia Journal of World Business 540 xxvi/4 (1991), pp. 16– 28. See also Per Högselius, Red Gas: Russia and the Origins of European Energy Dependence (London, 2013).

541 7. Richard Green, The, Cost of Nuclear Power Compared with Alternatives to , 542 the Magnox Programme , Oxford Economic Papers,New Series xlvii/3 543 (1995), pp. 513– 24. 8. The Pressurised Water Reactor uses heat exchangers to transfers heat to the 544 boilers; the Boiling Water Reactor transfers the steam straight from the 545 reactor to the generators.

,, , , 9. Leopoldo Nuti, , Me Too, Please :Italy and the Politics of Nuclear Weapons, 546 , 1945– 1975 , Diplomacy &Statecraft iv/1 (1993), pp. 114– 48; and Simone

547 Turchetti, AM, ost Active Customer: How the US Administration Helped the

,,, , 548 Italian Atomic Energy Project to , De-Develop , Historical Studies in the Natural Sciences xviv/5 (2014), pp. 470– 502.

549 , 10. J.P. Crette, Review, of the Western European Breeder Programs , Energy

550 xxiii/7– 8(1998), pp. 581– 91. 551 11. Arnulf Grubler, The, costs of the French nuclear scale-up: Acase of negative , learning by doing , Energy Policy 38 (2010), pp. 5174– 88. 552 12. Thomas Cochran et al., Fast Breeder Reactor Programs: History and Status

, 553 (Princeton, 2010); and J. Bouchard, The, French Fast Breeder Programme , Atomic Energy cix/5 (2011), pp. 299– 308.

554 , 13. See Robin Cowan, Nuclear, Power Reactors: AStudy in Technical Lock In , 555

Journal of Economic History l/3 (1990), pp. 541– 68. 556 14. Man-Sung Yung, Nuclear, non-proliferation and the future expansion of , 557 nuclear power , Progress in Nuclear Energy 48 (2006), pp. 504– 24. 15. Archives Nationales de France, Paris, 19770624– 9EDF, 3 e Programme , 558 maximal d engagement nucleaire en 1974 et 1975.Also: UK Department of 559 Energy, Cmnd 7107, Energy Policy, aConsultative Document (London,

, 560 1978); and UK House of Commons, Thermal, Reactor Policy , Hansard 25 January 1978,vol. 942, cc1391– 1408. Available at http://hansard.millbank 561 OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

334 Oil Counter-Shock

562 systems.com/commons/1978/jan/25/thermal-reactor-policy (accessed 26 July 2017) See also Simon Taylor, Privatisation and Financial Collapse in the 563 Nuclear Industry: The Origins and Causes of the British Energy Crisis of 2002 564 (London, 2007). 565 16. There is apronounced and regrettable deﬁ cit of work on the former Soviet Union and it appears time that economic historians should perform an 566 autopsy on the failed state. However, there are two well-researched and 567 informative texts on the Soviet nuclear industry: Paul Josephson, Red Atom 568 (New York, 1999); and Sonja Schmid, Producing Power: The Pre-Chernobyl History of the Soviet Nuclear Industry (Cambridge, MA, 2015). 569 17. Schmid, Producing Power. 570 18. Cochran et al., Fast Breeder.For afascinating contemporary account, see

, 571 Fast, Reactor Progress in the Soviet Union , New Scientist,4December 1975.

Additionally, for contemporary post-Soviet developments in fast reactor 572 technology, see A.V. Zrodnikov et al., Nuclear, power development in market , 573 conditions with use of multi-purpose modular fast reactors SVBR-75/100 , Nuclear Engineering and Design (2006), pp. 1490– 502.

574 19. Fabien Roques et al., Nuclear, Power: AHedge against Uncertain Gas and , 575 Carbon Prices , The Energy Journal xxvii/4 (2006), pp. 1 – 23.

, 576 20. IAEADatabaseand Roques et al., ,NuclearPower .Japan hasamean time from startto fi nish of 4.7years andthe UK 10.8 years; however 577 this is are fl ection of thetroubledAdvancedGas Cooled Reactor 578 programmewhere some plants took over twodecades from startto fi nish 579 andremainedinlimbo formanyyears aftercompletion.For example, constructionstarted on Dungeness Bin1966and wasalmost fi nished in 580 1973and yet theCEGB waiteduntil 1983 forcommercialuse,adecade 581 later.Heysham Iand Hartlepoolalso took adecade andahalftocomplete. 582 21. US Department of Energy, Offi ce of Nuclear Energy, Light Water Reactor Sustainability Program Integrated Program Plan,April 2013. Available at 583 http://large.stanford.edu/courses/2015/ph241/thorne2/docs/inl-ext-11– 584 23452.pdf (accessed 26 July 2017). 22. As of 2015 fuel for alight water reactor costs approximately $1880 per kilo or 585 over the service lifetime of the fuel, 0.52 cent per kw/h and natural uranium 586 fuels costs athird less at approximately $1,350, which when used by

587 MAGNOX reactors has an efﬁ ciency between 20 and 40 per cent of that found with aLWR: see World Nuclear Organisation, The, Economics of 588 , Nuclear Power ,January 2017. Available at http://www.world-nuclear.org/ 589 info/economic-aspects/economics-of-nuclear-power/ (accessed 27 February 590 2017). 23. Management Information Services Inc. for the Nuclear Energy Institute, 60 591 Years of Energy Incentives: Analysis of Federal Expenditures for Energy 592 Development (Washington, DC, 2015).

, 593 24. Marion Radetzki, ,Politics NotOPECInterventions Explain Oil s Extraordinary Price History, Energy Policy xlvi/1 (2012), pp. 382– 5. 594 OCS Chapter16— 1/2/2018— NANDHINI.P— 571980— IBTauris

The RoleofNuclearReactor Technology 335 595 25. Wolfgang Rüdig, Outcomes, of Nuclear Technology Policy: Do Varying , Political Styles Make aDifference? , Journal of Public Policy vii/4 (1987), 596

pp. 389– 430. 597 26. Timothy Luke, Technology, and Soviet Foreign Trade: On the Political ,

598 EconomyofanUnderdevelopedSuperpower , InternationalStudies Quarterly xxix/3 (1985), pp. 327– 53; Marshall I. Goldman, The, Soviet 599 , Union , Daedalus civ/4 (1975), pp. 129– 43. 600 27. US Government Accountability Ofﬁ ce, International Trade: Soviet Export Data (Washington, DC, 1990).

601 , 28. Caroline Kuhnert, More, Power for the Soviets: Perestroika and Energy ,

602 Soviet Studies xliii/3 (1991), pp. 491– 506. 603 29. William Kelly, Hugh Schaffer and J. Kenneth Thompson, The, economics of ,

604 nuclear power in the Soviet Union , Soviet Studies xxxiv/1 (1982), pp. 43– 68. 30. ChristopherMeissnerand Nienke Oomes, Wh, ydocountries pegthe waythey , 605 peg? Thedeterminantsofanchorcurrencychoice? , JournalofInternational 606 Moneyand Finance xxviii/3(2009), pp.522– 47. 31. IAEA Power Reactor Information Service (PRIS) Database. 607 32. One issue that arose was the Soviet Union rarely appears as acohesive entity 608 on standard data sites and this limited the amount of data available. Indeed, 609 information on post-Soviet states is available for the period after 1991 but it appears the Soviet Union is no longer of interest as acohesive entity that 610 lasted over 70 years as part of the international economic landscape. 611 Additionally, any data post-1992 on the Soviet nuclear or energy industry 612 effectively does not exist and an aggregate of the 15 post-Soviet states would be disingenuous at best, as each has its own independent energy policies. 613 33. See the chapter by Angela Santese in this volume. 614 615 616 617 618 619 620 621 622 623 624 625 626 627 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

1 2 3 4 5 6 17 7 8 9 10 ASmall Window:The Opportunities for 11 RenewableEnergies from Shockto 12 13 Counter-Shock 14 15 16 Duccio Basosi 17 18 Introduction 19 Among energy historians there is widespread consensus that the long 20 phase of low oil prices that started in 1985, and which lasted until the 21 beginningofthe twenty-ﬁ rst century,hindered the development of solar, 22 wind, and other renewable energy technologies: few would disagree with 23 , Leonardo Maugeri sconclusion that the low price of oil was the ultimate

24 kille, r , of renewable energies.1 25 Such aclaimraisesthree observations.The ﬁ rst is that,given the 26 overall poor contribution by renewables to energyconsumption since 27 thebeginning of theperiod, andthe negligible contribution by solar

28 andwindinparticular, such ,killing, should be understood as thekilling 29 of an opportunity,ratherthanthe destructionofsomething that was 30 alreadyinplace. 2 Thesecond is that counterfactuals are notavailable 31 andwedonot know what alternative path historymight have taken,

32 hadthe ,killing , notoccurred.The thirdisthatareﬂ ection on this topic 33 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

ASmall Window 337

34 is nevertheless notanidleone, sincethere was indeed achasm between 35 theexpectationsnurturedinthe 1970sand early1980s,and thevery 36 limited development that renewablesregistered in thefollowingthree 37 decades. 38 This chapter aimsatanswering two questions. The ﬁ rst concerns 39 howbig thechasm was. Theavailabledatashowthatsubstantial public 40 and privateinvestments were madeinrenewable energiesinthe second 41 half of the1970s,particularly in R&D, mainly in theUnited States and 42 to aminor extent in Japanand Western Europe, with more than $20 43 billion invested over theperiod 1975– 85. 3 Butdataalone do nottell us

44 much about expectations. Thesecond question concernsthe actual role , , 45 of thefall of oil prices in killing renewables:was it theonly factoror 46 diditact in combination with other processes? Both questionshave

47 already been addressed in recentyears. As the ﬁ rst is concerned,Daniel 48 Yergin hasconcludedthatby1979 ,theideathatthe worldneeded to 49 transition to what wasthencalled solarenergy(andlater renewables) , 50 hadalreadybecome aclear trend in energythinking . 4 While 51 recognising that public funding forrenewables wasalwaysafraction 52 of what governmentsreservedtonuclear energyand fossilfuels, Bruce 53 Podobnikhas gone as farastorepresent theyears followingthe 1973 oil 54 pricehikeasaperiod when theconvergence betweenthe efforts of

55 statestodiversifytheir energysuppliesand themobilisation of , , 56 grassrootsenvironmentalism madean energytransition away fromoil 57 andtoward renewables arealistic option,ifnot onepractically just 58 beyond thecorner.5 With an eyeatthe challenges of thetwenty- ﬁ rst 59 century,Vaclav Smil hasclaimedthat 60 61 recent anticipations of afairly rapid and comfortingly smooth 62 transition to renewable energies hadanotableprecedent during the

, 63 aftermathofthe ﬁ rsttwo energy cr, ises (1934 – 74 and1979 – 81) 64 when thoselarge,OPEC-driven increasesinoil prices convinced many people that theend of thehydrocarbon erawas imminent and 65 that agrand transition to renewable wasabout to begin.6 66 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

338 Oil Counter-Shock

67 As to the question concerning the role of the counter-shock, it is obvious 68 that alow price for acertain good – oil in our case – does not necessarily 69 imply itsincreasedconsumption.ParaphrasingSheikhYamani, 70 whatever the price of stones since the end of the Neolithic, it was 71 never low enough to relaunch the stone age.7 But as the enabling factors 72 are concerned, which allowedthe counter-shock to deploy its effects, 73 energy historians appear divided.Some have stressedthe negative impact 74 of the coming to powerofthe Reagan administration in the United 75 States: after 1981 – thus well before the counter-shock – public research 76 funding and other forms of support for renewables remained for some 77 years in the budgets of Japan and some West European countries, but , 78 were effectively slashed in the world slargest economyand most 79 technologically advancedcountry. 8 Others have judged that the 80 enthusiasm for renewablesinthe 1970s had been excessive and 81 eventually counterproductive: in their view, it was the unrealistic goals 82 and the waste of public money of that decade that doomed renewables 83 once oilpricescamedown.9 84 The main limitationofthe existing literature is that it appears as 85 being based on averylimited review of the public debateofthe time, and 86 mostly concentrated on the United States.Bytaking abroader outlook 87 on the energy debate of the 1970s and early 1980s, this chapter reviews 88 the main works of intellectualsand scientists as well as the ofﬁ cial 89 discourses on future energy scenarios made at governmentlevel, with an

90 emphasis on how these were crystallisedinof ﬁ cial multilateral forums. , , 91 As is shown in the ﬁ rst section, the generalised talk of energy transition 92 in the 1970s and early 1980s did open awindow of opportunity for 93 renewable energies worldwide.But the actual size of that window appears 94 to have always been relatively small, both in the public debate and in the 95 scenarios depicted by public authorities, as is shown in the secondand 96 third sections respectively. Furthermore, as shown in the fourth section,

97 aclose analysis reveals that the support for renewable energies – just like , , 98 that for the moregeneral concept of energy transition – was often 99 founded on the fear of an imminent exhaustion of oil reserves, which was OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

ASmall Window 339 , , 100 easily disproved by the oil glut of the early 1980s. As the concluding 101 section summarises, the counter-shock did close the window. But the 102 clash between fossil fuels and renewables had never really been atitanic 103 one and, to the extent that renewables had been promotedaspart of the 104 solution to afalse problem, it is not surprising that interestinthem 105 declined for awhile, once the misunderstanding becameclear. 106 107 AWindow of Opportunity, 1973–85 108 Doubts andmisgivingshad accompaniedthe success of hydrocarbons 109 as primaryenergy sources sincethe late nineteenth century,bothfor 110 theirdepletabilityand theenvironmental consequences of their 111 combustion. 10 Historian LewisMumford,who in 1931 possibly wrote 112 the ﬁ rsthistory of theworld wheresources andforms of energy 113 featured prominently in shapingthe characteristics of historical eras,

114 couldnot refrain from expressinghis desire that ,carboniferous 115 capitalism, be soon substituted by anew civilisation basedonsolar 116 energy. 11 In theearly 1950s, whilecivilian nuclearenergyfound 117 powerfulsponsors in governmental circlesbothinWashington andin 118 , Moscow, PalmerPutnam s Energy in theFuture was atriumphal chant 119 to themiraculousfeatures of theatomand avery optimistic outlook 120 aboutits abilitytoreplaceoil in thenot-so-distantfuture.12 Though 121 concernedmainlywithdemography,the following year Harrison 122 , , Brown s TheChallenge of Man sFuture openlydiscussed the

123 possibility of a ,transition , fromhydrocarbons to waterpower, atomic 124 energy andsolar energy.13 In 1969, thetitle of an essaybythe same

125 author was likely the ﬁ rst ever to featurethe expression ,energy 126 transition, intended as amajorchangeinthe ways societiesproduce 127 andconsume energy.14

128 But after 1973the quadrupling of oil pricesand the so-called Arab, 129 embargo, were the catalyzers for atrue ﬂ ood of publicationsinmultiple 130 languages about an energy future imagined as necessarily different from 131 the recent past.15 The words used to approach the topic varied depending 132 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

340 Oil Counter-Shock

133 on taste and language. The future was often evoked in booktitles, namely , 134 in ATimetoChoose (subtitle: America sEnergy Future)bythe Ford , 135 Foundation sEnergyPolicy Project (soon translatedinto Italian), in 136 Energy Future by Harvard researchersDaniel Yergin and Robert 137 Stobaugh (soon translatedinto German and Spanish), and Energy in a 138 Finite World (subtitle: PathstoaSustainable Future), the ﬁ nal report of a 139 multinational scientiﬁ cprogramme carried out at the Vienna-based 140 International Institute for Applied Systems Analysis (IIASA) under the

141 direction of West German physicistWolfHäfeleand with the

, ,

142 involvement of scientists from 19 countries from both the West ,the

, , , , 143 Sovietbloc and the Third World . 16 144 As early as 1974, Cesare Marchetti, an Italian physicist working at

145 IIASA, had instead presented in Moscow the ﬁ rst version of his model of , , 146 the working of primary energy substitutions in history,inwhich the 147 extrapolations of past trends led to the mechanical conclusion that , 148 natural gas would overtakeoil by the year 1990 as the world smain 149 energy source, to be then overtakenbynuclear around 2070.17 In 1976 150 the columnsof Foreign Affairs presented the English language with a

151 more poetic alternative: inspiredbyRobert Frost sverses on the, road not , , , 152 taken ,the physicist Amory Lovinsoutlined a hard energy path based

153 on current trends of massive consumption of non-renewable and , ,

154 pollutingenergies, and a – preferable, in his view – soft energy path

155 based on conservation and renewables.18 Technical works on ene, rgy

, ,

156 switches were presented in the specialisedliterature.19 Radical energy , , 157 revolutions were neverout of sight.20 More cautious energy , 158 perspectives were debated.21 Works dedicatedtospeciﬁ cenergy sources 159 that should lead the transition becameactual bestsellers,including Denis

160 Hayes scelebrated Rays of Hope,which indicated both the potential for a , , 161 post-petroleum economy by the third decade of the twenty-ﬁ rst century 162 and the measures necessarytoachieve it.22 In German, the term Energie-

163 wende ﬁ rst appeared in 1980inavolume by three researchers of the 164 newly founded Oko-Ins€ titut, which laid out the path to achieve aw, orld , 165 without nuclear and oil by 2050. 23 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

ASmall Window 341 , , 166 The phrase energy transition ,with which today we are accustomed 167 to deﬁ ne substantial changes in the ways energy is consumedand 168 produced, was also aproductofthose years, probably becoming the most 169 popular of all the expressions used in the energy debate of the time:inthe , 170 UnitedStates, Roger Naill s Managing the Energy Transition in 1977 was 171 most likely the ﬁ rst book to carry the full phrase in its title (soon to be 172 followed by Energy: Managing the Transition,published in 1978 under 173 the auspices of the TrilateralCommission).24 But the use of the phrase 174 quickly spread to the rest of the world. By the late 1970s and early 1980s 175 it was bothused by non-native English speakers in their publications in 176 English,25 and in translation in variouslanguages since the early 1980s.26 177 In spite of the different expressions in use, acommon characteristic 178 of all these works was the acceptanceofaviewpoint that had belonged 179 onlytomarginal minorities so far: the relationship between humankind 180 and energy had changed in the past and could – indeed should – change 181 again in the future. From this standpoint the post 1973 years marked

182 something more than just the emergence of societal responses to high , , 183 energy prices in the form of policies and country-level initiatives . 27 In 184 any case, as can be easily veriﬁ ed, the number of publicationsdedicated 185 to thesetopics dramatically fell after 1985.28 186

187 The Role of Renewables in the Intellectual Debate 188 on the Energy, Transition, 189 Renewables were indeedpart of the energy debate of the late1970s and 190 early 1980s. But whatever the enthusiasm of grassroot environmental 191 groupsfor them, they were never at the heartofthe public discourse, and 192 their development was often left to arather undeﬁ ned future. Of course, 193 the centrepiece of both intellectual works and pronouncements by public 194 authorities was usually energy conservation. Where substitution of oil 195 wasrecommended in terms of national policies,somein ﬂ uential works 196 , published in the United Statestook the sides of renewables: Hayes s Rays 197 of Hope was obviously acase in point, whose reason of interestconsists 198 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

342 Oil Counter-Shock , , 199 also in its attempttoplan for a global transition.29 Globality of approach

, 200 and renewables were also crucial in Lovins srecommendationsfor so, ft , 201 energy paths ,whereatransitionalperiod based on coal and conservation 202 would prepare the full development of soft technologies – namely solar 203 – by 2025.30 Acomplete, radical and hopefully global shift to renewables 204 was alsoatthe heart of the works of biologist Barry Commoner, whose 205 1971 book The Closing Circle had already been saluted worldwide as a 206 foundational stone of political ecology, and who developed an infl uential 207 ecological critique of existing energy policies fi rst in The Politics of Energy 208 (1979).31 Amore cautioussupport for the solar path camefrom Yergin , 209 and Stobaugh s Energy Future. 32 210 However, there are two major caveatsthat need to be taken into 211 account in weighingthe importance of these works. The fi rst is that even 212 in the UnitedStatesthese indicationsalways competedwith powerful 213 indications in differentdirections, in which national oil, coal, natural gas 214 and nuclearwere indicated as the best alternatives. The Institute for 215 Contemporary Studies, aconservative think tank based in San Francisco, 216 quickly published No Time to Confuse – apatent response to a Time to 217 Choose – apamphlet where notable energy economists discouraged the 218 US government from undertaking any active energy policy in favour of 219 diversifi cation, on the basis of the notion that the marketplace would 220 solve any problem with the oil supply.33 And yet,even ATime to Choose, 221 often indicatedasfavourable to renewablesfor its supporttogovernment

222 funding of their development, actually expressedthe certainty that, 223 within the contextofgreater efforts at conservation, the, oil and gas 224 resource base in this country is far from exhausted andcan supply over , 225 half the U.S. energy supply [...] for the remainder of the century . 34 Not 226 unsurprisingly (if one thinks of the developments in Alaska, Mexico and

227 the North Sea), several publications of the time were not suggesting a , , 228 transitionaway from oil, but amore limited one away from OPEC oil . 35 229 The secondcaveat is that outsidethe UnitedStates the energy debate 230 was even less focused on renewables. For example, there was little about 231 renewablesinthe Italian contextexcept for the translation of Barry OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

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, 232 Commoner swork. Of course, one would have avery hard time fi nding 233 references to solarorother renewableenergiesinthe long list of 234 publicationsbyMarchetti,who was alwaysadevoted suppoter of the 235 atom.36 Even less so in theFrench energydebate, which waslargely 236 focused on nuclearenergy.37 Similarly,inthe Brazilian debate, a 237 energiadofuturo was an undefi ned phrase stretching fromnuclear 238 fusion to hydro andsolar, theroad to whichinany case should be paved 239 by aclear choice fornuclear fi ssion. 38 Even in itslonger-term

240 indicationsthe TrilateralCommission recommended thedevelopment , , 241 of newLDC resources in ordertoeasethe pressureonOPEC supplies, 242 as well as acloser dialoguewithOPECitself. To theextent that it

243 considered alternatives to known oil reserves, the Trilateralsupported

, , , 244 jointnuclear policies ,while bilateral andmultilateralresearch and , 245 developmentinitiatives should be directed towardaset of ﬁ elds where

246 solarenergywas mentioned only in passing,betweennuclear fusion , , 247 and advanced deep sea drilling technology . 39 To theextent that it 248 recognised that itspreferredsource – nuclearenergy – would not ,

249 suf ﬁ ce in theshort term,IAASA s1981report con ﬁ dently stated that 250 ,areturn to coal as amajorenergysourceisnot only necessary butalso , 251 inevitable . 40 Apeculiar combination wasthatsuggested in the Energie- , 252 Wende scenario, whichdid promise to coverhalfofGermany sneeds 253 from renewables, butalso suggested that the otherhalfbecovered from

254 coal.41 Theone Sovietenergyexpert who didexplicitly confrontthe , , 255 new sources of energy undertook this task fromthe perspective of a 256 limited andprogressiveintegration of such newsources in the 257 mechanisms of acentrallyplannedeconomy whose dependenceon

258 fossilfuels was neverquestioned.42 Thepicture didnot change much , , 259 even when the energytransition was seenthrough thelenses of

260 international political economy: RajendraPachauri, later to become the 261 head of theInternational Panel on ClimateChange, wascertain that ,in 262 themediumterm theroleofnew andrenewable sources of energyis

, , , ,,

263 likely to be closerto amosquito bite on an elephant sfanny than

, , ,,, 264 fortypercent of ourenergy . 43 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

344 Oil Counter-Shock 265 Renewables in the Institutional Views of the Energy, , 266 Transition 267 An important role in drawing future world energy scenarios was played 268 by governments. While all over the world new ministrieswere endowed

269 with crafting energy, policies, ,international forums were involved in the 270 task of ﬁ nding an elusive equilibrium between energy conﬂ ictand energy 271 cooperation.44 Renewables were also part of these efforts and in 1978the

272 UN Secretary General convened aspecialconference on Ne, wand 273 Renewable EnergySources, for 1981.45 But if the scienti ﬁ c-intellectual 274 debate was what has been described above, it is not surprising that 275 renewableswere aminor addendum when it came to governmentsand 276 international organisations. By 1987,JohnBlackburn described the

277 establi, shment view, of such institutions as the International Energy 278 Agency and the World Bank as virtually deaf to renewable energies.46 279 Of course, there were episodes in which they were emphasisedin

280 , , policy (such as in Japan s Sunsh, ine project , ,Denmark swind power 281 , projects and Brazil sinvestments in bio-ethanol),but in terms of 282 representations of the future,renewableshad amajor role only in aset of 283 announcements and gesturesbyUSPresidentJimmy Carter. Between 284 1977 and 1980,Carter created the Solar Energy Research Institute 285 (entrustingthe chairmanship to Hayes), had asolar water-heater system 286 mounted on the rooftop of the White House,and announced that by the 287 year 2000 the US would receive 20 per cent of its energy from the sun.47 288 However, recent writing on the subjecthas often concealed abasic fact 289 that wasextremely clear to contemporary critics: it is true that Carter 290 sponsoredsolar energy, but did this at the same time when he was 291 promoting – with muchgreater incentives – almost any other form of 292 energy, provided it did not comefrom OPEC.48 Nowhere is this more 293 visible than in his ﬁ rst televised energy speech to the nation,known as

294 , the cardiga, nspeech, for the president scalculated decision to wear a 295 sweater so as to promote the virtues of energy conservation. On that 296 occasion, the president was mostlikely the ﬁ rst politician in the world to 297 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

ASmall Window 345

, , , ,

298 associate the terms energy and transition – though not in asingle

299 phrase – when he claimed that twice, in the last several hundred years, , , 300 there has been atransition in the way people use energy ,adding that we , 301 must prepare quickly for athird change .But in an odd synthesis of

302 Lovins stwo-tempo prescriptions, he concluded that the future would

, , , ,

303 bring the renewed use of coal together with strict conservation and , , 304 permanent renewable energy sourceslike solar power . 49 Within three 305 years, arenewedemphasis on natural gas and national oil, as well as a 306 brand new enthusiasm for synthetic fuels, had already ascended the , 307 ladder of the administration spriorities.50 308 With all his contradictions,ofcourse the Carter administrationwas

309 still in the avant-gardeofchange. The ﬁ nal declarationsofthe so-called , , 310 G7 summits present us with asigniﬁ cant corpus of texts representing 311 what, year after year, the headsofstate and government of the most 312 industrialised Western countriesbelieved was alegitimate collective 313 synthesis of their respective positions.51 The summits had had energy at

314 their core since their inception in 1975. Even though no such formula as , , 315 energy transition was everused, the ﬁ nal declarations traditionally 316 abounded with commitments to energy policies which de facto depicted 317 adifferent energy future for agroup of countries that consumed half , 318 of the world sprimary energy. 52 Those indications had little to do with

319 renewables.Onthe one hand,the ﬁ nal declarationsofthe various 320 summits randomly shifted betweenthe pledge to reduce de, pendence on

321 oil (such as London 1977, Tokyo 1979 and Venice 1980)and that to , , 322 reduce the dependence on imported oil (Rambouillet 1975, Bonn1978). 323 On the other, coal and nuclearemerged by far as the winners of the 324 competition to replace what oil left to the alternatives, being regularly 325 emphasised at every successive summit. In that context, even the

, , , 326 celebrated pledgeundertakenin1980 at Carter sinsistence, to decouple 327 economic growthfrom growth in oil consumption can hardly be seen as 328 astep toward apost-fossil world. In the Carteryears (1977– 80), acameo

329 for renewablescould be detected only with great difﬁ culty under the

, , , 330 1977disguise of new energy sources and the 1979 formula of new OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

346 Oil Counter-Shock , , 331 technologies .The 1978 declaration,pledging to hasten also the , 332 development of new, including renewable,energy sources was the one 333 where pro-renewables enthusiasm was at its highest. After Ronald

334 Reagan took over the White House, references to renewableswere simply , ,

335 dropped and the very notion of governments handling an energy policy 336 was watered down by the ever-present reminder that the price, , 337 mechanism would be the polar star of energy choices. 338 Though important as both energy consumers and producers, the

339 Western industrialisedcountriesdid not exhaust the number of relevant

, , , 340 actors. In the context of the bipolar world and in that of the Third

341 World squest for aNew International Economic Order, it is not even , , 342 possible to assume that, had the West led the way, the rest of the world 343 would havefollowed suit.53 From this standpoint, the reality of the Soviet 344 bloc (contributing to roughly one-ﬁ fth of world energy consumption)54

345 cannot be overemphasised: while Soviet scientists were indeed involved , , 346 in the global energy debate, for the Kremlinthe actual energy transition 347 of the 1970s was to be intended as the completion of the movement 348 towards oil.55 As for the Third World,anoverall picture of what , 349 Third World governments believedtobeacceptable public stances – 350 actually mediations amongcountries with very different conditions and 351 priorities – can be derived from an analysis of the ﬁ nal declarations of 352 the summits of the Non-Aligned Movement (NAM).56 The NAM 353 repeatedly expressed itsinterestinthe development of renewable sources

354 since the late 1970s. The ﬁ nal declaration of the 1979 Havana summit , , 355 read that the NAM welcomed the upcoming UN Conference.57 In 356 reference to the measures agreed uponatthe UN Conference – quite

357 vague according to all reports – the New Delhi summitof1983 lamented , , 358 that little progress had been made in the implementation.58 In Harare in ,

359 1986 the NAM sheads of state and government even evoked the goal of 360 ensuring an, orderly transition from the present patternofenergy 361 production and consumptiontoone that will be based increasingly on , 362 new and renewable sources of energy . 59 Outsideofthe NAMframework, 363 in September1979 José López Portillo, then the president of an oil- OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

ASmall Window 347

364 producing heavyweight,gaveanambitiousspeech at the UN General ,

365 Assembly, laying down Mexico sgovernment proposals to make as

366 smooth and non-conﬂ ictual as possible what it saw as the energy, , , , 367 transition in course: a world energy plan should be adopted under the 368 umbrella of the UnitedNations, promoting energy conservation and 369 370 the exploitation of potential reserves of all types, traditional and 371 non-conventional [ ... ]. These include the sun that heats our 372 tropics and burns so many deserts; the water that runs uselessly 373 down so many mountainsides eroding the soil along its path; the ignored heat within our earth; the unused energy of the wind, and 374 that of the sea, of the atom and of life itself.60 375 376 But two caveats should be keptinmind in weighing these pro-renewable 377 stances. The ﬁ rst is that often they camewithin abroader envelope, 378 , remindful of Carter sapproach: to mentionrenewables did not imply to 379 focusonly – not evenprevalently – on them. Thus, not only the 380 declarationsinfavour of the right for each state to pursue its civilian 381 nuclear plans regularly preceded those about renewables in the NAM 382 documents, but the latter were also complemented by the punctualisa-

383 tion that in, the short and mediumterm alternativesources of energy 384 could not replace the traditional energy sourcesineconomicand social 385 development, or by similar formulas.61 The second is that the interest for 386 renewables needs to be understood in acontextinwhich most Third 387 World countries actuallyconsumed prevalently renewable energies 388 (in the form of biomass) and their governmentstended to identify the 389 consumption of energy intensivefossil fuels, or nuclear, as anecessary 390 passage of the drivetoward modernisation.62 In short,such openings 391 were part of ageneral diplomatic strategy in which restating the need for 392 technological transferfrom North to South – amajor elementofthe 393 desired New International Economic Order and amajor object of 394 contention with the industrialised West – waspossibly more important 395 than the energy subject per se.63 396 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

348 Oil Counter-Shock

397 Why Transitioning? 398 The two previous sections should have made clear that renewables were,

399 in most formulations, only aminor ingredient of transiti, on, plans whose 400 endpoint was not necessarily away from oil – even less so away from 401 fossil fuels – at least for the foreseeable future. However, to the extent 402 that renewables were one of the elements of the energy debate of the 403 1970s andearly 1980s, this section will highlight afurther and often

404 overlookedweaknessofthe discourses on the energy, transition, of the 405 1970s which involved also most – though not all – of the formulations of 406 the needfor the development of renewables. 407 In general, it was the very way in which the window of opportunity 408 was opened that also determined the wayitwould be closed: there was 409 virtually no scientifi cwork or offi cial stance, amongthose recommend- 410 ing active policies to reach the desired future energy scenarios,that was 411 not premised on the notion that oil prices would remain high. But more 412 specifi cally, alarge part of the debateonfuture energy scenarios was 413 , based on the premiseofthe imminent exhaustion of the world s(in some 414 case non-OPEC) oil reserves, in aparticularly virulent version of what, in

415 reference to the US case, Roger Stern has called the, oil scarcity 416 ideology, . 64 By the mid-1980s, these forecasts were proven wrong,

417 cripplingall arguments in favour of an energy, transition , .Ofcourse, as 418 MatthieuAuzanneau has emphasised, the mostrenowned speakerfor 419 the quick exhaustion of oil was Jimmy Carter,when based on data from 420 the CIA, the US president proclaimed that oil would be gone by the mid- 421 1980s, only to be ridiculed afterwards.65 422 However, the argument had amuch wider audience.That of the 423 depletability of fossil resources was far from being anew theme in the 424 1970s.66 To be sure, its implications over the longer term are still open

425 and delicate questions. 67 But the oil, shock, of 1973 simply turned out to 426 be an irresistible catalyzer for doomsday prophecies,asiseasily veriﬁ able 427 in the quick change in the language of the Club of Rome, aprivate 428 association of business people and academics whose reports becametrue 429 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

ASmall Window 349

430 bestsellers worldwide:what in The Limits to Growth,the ﬁ rst report , , 431 published in 1972 had been presented as possible scenarios for the 432 future exhaustion of raw materials, the second report published in 1974 433 presented as the certaintythat oil would be gone by 2025 (and possibly 434 evenby1985).68 , 435 Several observers, starting fromthose of theFord Foundation s 436 EnergyPolicy Project,did caution thepublicthathigherprices – 437 andpossibly targetedpolicies – couldalso imply greaterincentivesfor 438 newexplorations (which hadinsteadstalled during the1950s and 439 1960s),which in turn wouldlikely delivernew reserves.69 It is also 440 interesting to note that theoil exhaustion scare didnot concern 441 Amory Lovins andBarry Commoner,two of themost consequential 442 supporters of renewable energies,who were much moreconcerned

443 with theemissions of CO2inthe atmosphere and, moregenerally, the , , 444 thermodynamiccarnage of theprecious energy accumulated in 445 thesubsoil in hundreds of millions of years. 70 However, someform of 446 theimminentexhaustion theory could be found in almost all the 447 publications on theenergyissue.DenisHayes con ﬁ dently wrote in 448 1978: 449 450 Oil and natural gas, which now account for about three-ﬁ fths of , 451 the world sannual fuel consumption, will almost certainly have 452 been re-duced to subordinate roles in the global energy picture by 453 2025. Indeed, world oil production could begin to decline before 1990.71 454

455 , Don Hedley s1981 World Energy began with the claimthat the, world is 456 running outofthe fuels with which it built the technological world of 457 , today, and the Oko-Institute s Energie-Wende started by mentioning the 458 foreseen Erschöpfung von Mineralöl made patent by events of the 459 1970s.72 Betraying the spirit of the original, the Italian edition of ATime 460 to Choose did not refrain from putting exhaustion at the top of the list of 461 energy challenges.73 Other authors focused on the localexhaustion of oil 462 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

350 Oil Counter-Shock

463 resources: accordingtoatypical phrasing of this kindofworks, in 1980s

464 the resources the UnitedStatesconsumed the most were not those with 465 which it was more endowed, which raised aquestion of nati, onal ,

466 security . 74 Amore ambivalent approachwas that chosen – maybe not 467 chosen – by the IIASA, whose 1981 publication discussed at length the,

468 energy problem but wasvery shy in deﬁ ning it: when it did, it oscillated

, , , , 469 between putting rising prices and dwindlingresources at the core of 470 the issue.75 471 472 Conclusion 473 Theyears between 1973 and1985 saw thedevelopmentofadebate on 474 , theworld senergyfuture. It originatedlargelyinthe United States but 475 hadglobal rami fi cations. Withinthatcontext, it is undeniablethat 476 renewable energieshad awindowofopportunity.However, mostof 477 thescenarios depicted at thetime – either by intellectuals or by 478 governmental andintergovernmentalagencies – saw renewables only 479 as minorelements of future energy mixes, andlefttheir development 480 mainly foraratherunde fi ned longer term.Besidesconservation, 481 diversifi cation toward non-OPEC oil, coal,natural gasand nuclear

482 energywerebyfar theprivilegedsolutionstothe ,energyproblem, of 483 thetime. This is perfectly consistentwiththe numbers,thatshowthat

484 even in theIEA countries, where thedebateonthe ,energytransition , 485 thrived, renewables neverreceivedmore than 20 percent of public 486 R&Dfunding (and gotclose to that threshold only in theyear1980). 76

487 Further, in line with much of thedebateonthe ,energytransition , of the 488 time,the case forrenewables wasoften stated as aresponse not only to 489 thehighpricesofoil (which of course made theargument vulnerableto 490 theeffects of thecounter-shock), butalso to theforeseen imminent 491 exhaustionofoil reserves. Alternativeformsofcriticism of thereliance 492 on oil(andfossil fuelsmore generally) didemerge, based on the 493 concern forthe accumulation of CO2inthe atmosphere andon 494 questionsaboutthe long-term sustainabilityofamodel of development 495 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

ASmall Window 351

496 basedondepletable sources.Two decadeslater, the concern forthe 497 greenhouse effect produced by theburning of fossil fuels – aproblem

498 relatedtorelative abundance rather than to scarcity or energyprices – , , 499 would indeed become thecrucial element in a renewed debate on 500 renewables.77 Butinthe period covered in this chapter this argument

501 remainedmarginal and – much to thedismay of those whohad

, ,

502 expressed it – in theearly 1980s it wasdrownedbythe oilglut , , 503 together with therest of thevisions of the energytransition that had 504 come aliveafter 1973. 78 505 506 Notes 507 , 1. Leonardo Maugeri, Con tutta l energia possibile (Milano, 2011), p. 26. 508 2. Renewable energies are virtually unmentioned in the main histories of world 509 energy, as the 1970s and 1980s are concerned: Vaclav Smil, Energy in World History (Boulder, 1994); Jean-Claude Debeir, Jean-Paul Deléage and Daniel 510 , Hémery, Histoire de l énergie (Paris, 2013). They accounted for little more , 511 than 5per cent of the world scommercial primary energy consumption in 512 1970 and had not made any signiﬁ cant advance by 1985, in acontext in which high oil prices had led to aneat decreased consumption of oil and to 513 slower growth of overall energy consumption. By the time of the oil price 514 counter-shock in 1985, fossil fuels still covered some 90 per cent of total 515 consumption, although oil had ceased asmall part of its original portion to coal and natural gas. Virtually the whole quota covered by renewables came 516 from hydro-power. Source: BP, Statistical Review of World Energy (London, 517 2017), p. 11. 518 3. IEA, Key Trends in IEA Public Energy Technology RD &DBudgets (Paris, 2016), p. 11. Values are expressed in 2015 US dollars. 519 4. Daniel Yergin, The Quest: Energy, Security and the Remaking of the Modern 520 World (New York, 2011), p. 523. 5. Bruce Podobnik, Global Energy Shifts: Fostering Sustainability in aTurbulent 521 Age (Philadelphia, 2006), chapter 6. 522 6. Vaclav Smil, Energy Transitions: History, Requirements, Prospects (Denver, 523 2010), p. 129. 7. Ahmed Zaki Yamani, Saudi Minister of Oil between 1962 and 1986, once

524 declared to aBritish newspaper: The, Stone Age came to an end, not because 525 we had alack of stones, and the oil age will come to an end not because we

, , 526 have alack of oil ( Sheikh, Yamani predicts price crash as age of oil ends , Telegraph,25June 2000). 527 8. Yergin, TheQuest,p.531;Podobnik, Global,p.135;Hermann Scheer, 528 Autonomiaenergetica. Ecologia,tecnologia esociologiadelle risorserinnovabili OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

352 Oil Counter-Shock

529 (Roma, 2006)[Energieautonomie (München,1999)], p. 18;FedericoButera andGianniSilvestrini, Il futuro delsole (Milano, 1990), p. 30. 530 9. Smil, Energy Transitions,pp. 130– 1; John Deutch, The Crisis in Energy 531 Policy (Cambridge, MA, 2011), pp. 13– 14. 532 10. Scheer, Autonomia,p.36. 11. Lewis Mumford, Technics and Civilization (London, 1934), pp. 222– 4. 533 12. Palmer Putnam, Energy in the Future (New York, 1953). , 534 13. Harrison Brown, The Challenge to Man sFuture (New York, 1954).

, 535 14. Harrison Brown, ,Population,Food,and theEnergyTransition ,in S. Behrman, L. Corsa and R. Freedman, Fertility and Family Planning

536 (Ann Harbor, 1969), pp. 180– 96. 537 15. Kathleen Araùjo, ,Theemerging ﬁ eldofenergy transitions: Progress, , 538 challenges,and opportunities , EnergyResearch&SocialScience 1(2014), pp.112– 21. , 539 16. Ford Foundation Energy Policy Project(FFEPP), ATimetoChoose: America s 540 Energy Future (Cambridge,MA, 1974); Robert Stobaugh andDanielYergin (eds), Energy Future (New York,1979);WolfHäfeleetal., Energy in aFinite 541 World: PathstoaSustainableFuture (Cambridge,MA, 1981). Also:Academy 542 Forum, Energy:FutureAlternativesand Risks (Cambridge,MA, 1974); Don

543 Henley, WorldEnergy: TheFacts andthe Future (London, 1981). 17. The model was formalised in Cesare Marchetti, Primary, Energy Substitution 544 , Models: On the Interaction between Energy and Society , Technological 545 Forecasting and Social Change x/4 (1977), pp. 345– 56.

, 546 18. Amory Lovins, Energy, Strategy: The Road Not Taken? , Foreign Affairs lv/1 (1976), pp. 65– 96.

547 19. Jim Skea, Switching, from oil to coal ﬁ ring for steam raising. Acase study at , 548 alarge industrial site , Energy Policy ix/3 (1981), pp. 205– 16; Vangelis

, 549 Magirou, Switching, away from oil. Agame-theoretic approach , Resources and Energy vi/4 (1984), pp. 397– 410.

550 20. André Varagnac, La conque^ te des énergies (Paris, 1972); Alieto Aldo 551 Guadagni, La, revolución energética: el rol de la sustitución del petróleo yla , conservación de energía , Desarrollo Económico xxiv/95 (1984), pp. 339– 66;

552 James Hilbert Anderson, ,Ocean Tidal Power:The Coming Energy , 553 revolution , Solar &Wind Technology ii/1 (1985), pp. 25– 40.

, 554 21. Michel Boudy, Perspectives, énergétiques entre 1980 et 2000 , Norois 108 (1980), pp. 497– 511. 555 22. Denis Hayes, Rays of Hope: The Transition to aPost-Petroleum World (New 556 York, 1977). 557 23. Florentin Krause, Hartmut Bossel and Karl-Friedrich Müller-Reissmann, Energie-Wende. Wachstum und Wohlstand ohne Erdöl und Uran (Frankfurt 558 am Main, 1980). 559 24. Roger Naill, Managing the Energy Transition (Cambridge, MA, 1977); John 560 Sawhill, Keichi Oshima and Hanns Maull, Energy: Managing the Transition (New York, 1978). 561 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

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, 562 25. Ali Ahmed Attiga, Global, Energy Transition and the Third World , Third World Quarterly i/4 (1979), pp. 39– 56; Rajendra Pachauri, The Political 563 Economy of Global Energy (Baltimore, 1985), Chapter 2.

564 26. Yuri Kononov, E`nergetika ie`konomika: problemy perehoda knovym istoc^ nikam ènergii (Moskva, 1981); Rubens Vaz da Costa, At, ransic ao 565 , energetica: tempo, capital etecnologia ,inH.Jaguaribe et al., Leituras de 566 Política Internacional (Rio de Janeiero, 1981), pp. 47– 55; Ali Ahmed Attiga, 567 Ibrahim Ibrahim and Ahmed El-Saadi, Impacto de la transición afuentes 568 energéticas no petroleras en los países árabes (México, 1981); Manuel Romaní Quilis, La Industria del gas en España: el gas natural, energía alternativa para 569 la transición (Madrid, 1982); Istituto di economia delle fonti di energia 570 (IEFE), Energia: una transizione difﬁ cile (Milano, 1983); Nations Unies, , 571 Commission économique pour l Europe, La Transition énergétique dans la région de la C.E.E. (New York, 1984).

, 572 27. Araújo, Energy, ,p.113. 573 28. This conclusion has been reached after amulti-language search for the keywords listed above in WorldCat. 574 29. Hayes, Rays.

, 575 30. Lovins, Energy, . , 576 31. Barry Commoner, La politica dell energia (Milano, 1980) [ The Politics of Energy (New York, 1979)], pp. 165– 202.

577 , 32. Daniel Yergin, Conservation:, the key energy source ,inStobaugh and 578 Yergin,Energy,pp. 130– 49. 579 33. Morris Adelman et al., No Time to Confuse (San Francisco, 1975). 34. FFEPP, ATime ,p.332. The reportalsosaw aminor,but encouragingrole

580 , for renewables ,after1985 (but it is interesting to note that theItalian , 581 editionwas introducedbyavitriolic prefacedeploring thereport s

, 582 downplaying of nuclearenergy):see MarioSilvestri, ,Premessa ,in FondazioneFord, Tempodiscelte (Milano, 1975) [FFEEP, ATime ], 583 pp.7– 22. For abroader picture of theanti-renewables literature,see 584 Scheer, Autonomia ,p.34. 35. This wasthe prevailingindicationfromthe participantsinthe Academy 585 Forum, Energy. Unexpected recommendationscamebyauthors forwhom 586 theUnited States should solve itsenergy problems simply by importing 587 more oil:Naill, Managing .Inany case,these were nottransitions away from oil. 588 36. Auseful bibliographic reference is the Cesare Marchetti Web Archive at 589 http://cesaremarchetti.org/publist.php (accessed 21 July 2017). 37. Debeir, Deléage and Hémery, Histoire,Chapter 9.

590 , 38. Vaz da Costa, At, ransic ao ,p.47.

591 39. Sawhill, Oshima andMaull, Energy,p.xiv.Also: P. Odell, ,Worldenergy , 592 in the1980s:the signi ﬁ canceofnon-opecoil supplies ,Scottish Journal of 593 PoliticalEconomy xxvi/3 (1979),pp. 215– 31. In asimilar vein,in1983 theItalian Istituto di Economiadelle FontidiEnergia(IEFE)still 594 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

354 Oil Counter-Shock 595 recommendedthatEuropeancountries enactpoliciesfor ,thedevelop- , ment of oil sources (evenhighcostones) out of theOPEC area :IEFE, 596 Energia, p. 14. 597 40. Hafele et al., Energy,p.28. Similar indications came from Hedley, World,

598 p. 17; Richard Lamb, Making, the Energy Transition , Energy Policy x/1 (1982), pp. 3 – 14; Wallace Tyner, Our, Energy Transition: The Next Twenty 599 ,

Years , American Journal of Agricultural Economics 62 (1980), pp. 857– 964. 600 Also see Peter Odell, Conference, report. Second Bat-Sheva International , 601 Seminar on Energy: Transition to the Post-Oil Era, Israel, 3 – 8January 1982 , Energy Policy x/3 (1982), pp. 256– 7. 602 41. Krause, Bossel and Müller-Reissmann, Energie-Wende,p.163; Kurt Schmitz 603 and Alfred Voss, Energiewende? (Jülich, 1980). 604 42. Kononov, E nergetika,pp. 142– 52. 43. Pachauri, The Political,p.28 – 9.

605 44. Francisco Parra, Oil Politics (London, 2004), pp. 189– 93. 606 45. R.S. Odingo, Prospects, for New Sources of Energy: AReport on the United Nations Conference on New and Renewable Sources of Energy, Nairobi, 607 , Kenya, 10– 21 August 1981 , GeoJournal 3(1981), pp. 103– 8. 608 46. John Blackburn, The Renewable Energy Alternative (Durham, 1987), p. 2. 609 47. Yergin, The Quest,pp. 523. 48. Commoner, La politica,pp. 5 – 10.

610 , 49. JimmyCarter, Ad, dresstothe Nation on Energy ,18April 1977, in University of 611 CaliforniaatSanta BarbaraAmerican Presidency Project(APP).Available at 612 http://www.presidency.ucsb.edu/ws/index.php?pid¼ 7369&st ¼ energy&st1 ¼ (accessed21July2017).

613 , 50. See for example Jimmy Carter, Interview, with the President ,28May 1980, 614 APP. Availableathttp://www.presidency.ucsb.edu/ws/index.php?pid¼ 615 44834&st ¼ energy&st1 ¼ (accessed 21 July 2017). 51. The full text of all the relevant ﬁ nal declarations of the G7 summits can be , 616 easily found on the website of the University of Toronto sG8Information 617 Center, at http://www.g8.utoronto.ca (last accessed 21 July 2017). All the information included in this paragraph is based on textual analysis of this 618 material.

, 619 52. Source: BP, Statistical, Review of World Energy 2015 Workbook (2015). 620 Available at www.bp.com (accessed 27 July 2017). 53. As ageneral reference to locate the energy debates in context: Odd Arne 621 Westad, The Global Cold War: Third World Interventions and the Making of 622 Our Times (Cambridge, UK, 2008).

, 54. Source: BP, Statistical, Review of World Energy 2015 Workbook .

623 , 55. JeronimPerovi c ,The SovietUnion sRiseasanInternational Energy , 624 Power: AShort History ,inJ.Perovi c, Cold WarEnergy: ATransnational 625 History of Soviet Oiland Gas (London, 2016), pp. 1 – 47:14; John Clark, The Political Economy of WorldEnergy (New York,1990),pp. 207– 9. Also: V.L.

626 , , Nekrasov, ,Industrial naja modernizacijaiènergetice skij perehod [Indus- 627 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

ASmall Window 355

628 trial modernization andenergytransition], Istoric eskijez egodnik (2007), pp.224– 40. 629 56. The ﬁ naldeclarations of theNAM summits areavailableonthe websiteof 630 theNon Aligned Movement DisarmamentDatabase of theMiddlebury 631 Collegeathttp://cns.miis.edu/nam/index.php/meeting/index?Meeting% 5Bforum_id%5D¼ 5&name ¼ NAM þ Summits(accessed18July2017). 632 The followingcitationsrefer to documentsincludedinthe database. 633 57. 6th Summit Conference of Heads of State or Government of the Non- 634 Aligned Movement (Havana, Cuba, 3 – 9September 1979), p. 112. 58. 7th Summit Conference of Heads of State or Government of the Non- 635 Aligned Movement (New Delhi, India, 7 – 12 March 1983), p. 79. 636 59. 8th Summit Conference of Heads of State or Government of the Non- 637 Aligned Movement (Harare, Zimbabwe, 1 – 6September 1986), p. 221. 60. José Lopéz Portillo, speech at the United Nations General Assembly, 638 27 September 1979. Iowe special thanks to Dr. Claudia Piña Navarro for 639 providing me with this document. , 61. Quotationfromthe 7thSummit s(NewDehli) ﬁ naldeclaration,p.95. 640 , Similarly, as shownbythe quotationabove,Lopéz Portillo splanendorsedthe

, , , 641 developmentof al, ltypes energy sources, traditionaland non-conventional . 62. To be sure, coal and nuclear energy were considered the only viable

642 , substitutes, for oil by those in OPEC who wanted to link oil prices to the 643 price of alternative fuels. See Ragaei El Mallakh (ed.), OPEC: Twenty Years 644 and Beyond (London, 1982).

645 63. This point was made forcefully in Odingo, Prospects, . 64. Roger Stern, Oil, Scarcity Ideology in US National Security Policy, 1909– , 646 1980 ,Working Paper of the Oil, Energy &the Middle East Program, 647 Princeton University (2012), available at https://www.princeton.eduhttps:// 648 www.princeton.edu/oeme/papers/Roger%20Stern%20Oil%20Scarcity% 20Ideology%20in%20US%20National%20Security%20Policy (last accessed 649 21 July 2017). 650 65. Matthieu Auzanneau, Or Noir. La grande histoire du pétrole (Paris, 2015), p. 422. 651 66. Leonardo Maugeri, The Age of Oil (Westport, 2006), pp. 114– 15 and 202– 6. , 652 67. Maugeri, Con tutta l energia,pp. 48– 53. 653 68. Respectively, Donella Meadows et al., The Limits to Growth (New York, 1972); and Mihajlo Mesarovic and Eduard Pestel, Strategie per sopravvivere 654 (Milano, 1974) [ Mankind at the turning point (New York, 1974)], p. 65. 655 69. FFEPP, ATime. , 70. On Commoner slively polemic from the columns of the New York Times

656 , , with M. King Hubbert, the main theorist of peak, oil ,see Ronald Doel, The 657 Politics of Predicting Natural Resources: M. King Hubbert and the Political , 658 (and Scientiﬁ c) Controversies surrounding Peak Oil ,paper presented at the 659 conference Pivotal Year: The 1973 Oil Shock and Its Global Signiﬁ cance, Firenze, 19– 21 September 2013. 660 OCS Chapter17 — 1/2/2018— NANDHINI.P— 571981— IBTauris

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661 71. Denis Hayes, The Solar Energy Timetable (Washington, DC, 1978), p. 6. 72. Hedley, World Energy,1981, p. 5; Krause, Bossel and Müller-Reissmann, 662 Energie-Wende,p.13.

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, , , 664 74. Tyner, Our, Energy ,p.959; Skea, Switching ,p.205; John Gibbons and William Chandler, Energy: The Conservation Revolution (New York, 1982), 665 p. 3. 666 75. Hafele et al., Energy,p.7. 667 76. IEA, Key Trends,pp. 4and 11. 77. Podobnik, Global,Chapter 7; Smil, Energy Transitions,pp. 107– 9. , 668 78. Paolo Degli Espinosa and Enzo Tiezzi, ILimiti dell energia (Milano, 1987), 669 pp. 22– 5. 670 671 672 673 674 675 676 677 678 679 680 681 682 683 684 685 686 687 688 689 690 691 692 693 OCS Bibliography— 1/2/2018 — NANDHINI.P— 571982— IBTauris

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