Monday, April 14, 2008

What I should have talked about in the last World History lecture

I have concluded that I missed an opportunity to discuss two important issues in the last World History lecture last Monday. I blame it on end-of-term fatigue.

The first of these issues is the coming global famine. I walked into the room wanting to say something about this, which reading the Egyptian news at Al-Ahram had alerted me to. Food prices have gone up for a while and now reasonably stable if not very prosperous countries like Egypt are being hit hard. Since Monday, I've read a lot more. Here is a detailed article from the Wall Street Journal, and here are Phil Paine's remarks at his blog (April 13 post). The Journal blames the rise on commodity prices, which is just code for oil; thus the food crisis is another indirect effect of the Iraq war.

The second issue I did mention briefly, in connection with the international criminal court in the Hague. The United States, extremely imperfectly, has provided leadership in the post-World War II world and various public and especially private initiatives originating there have had a positive effect. We cannot depend upon that anymore. Not only has the USA abandoned the multilateral approach to world peace, the need for which was so evident after both world wars, it has become a great danger to that peace, not in just one place or region, but everywhere its influence reaches. This post at the blog Empire Burlesque -- Too Much of Nothing: Crime Without Punishment, War Without End -- pretty much catches my mood. I'm not sure there will be an attack on Iran, but even without that concluding bit, things are quite bad enough as it is.

One of my more attentive students challenged me privately after the last lecture for my doom and gloom view of recent events. Actually, I felt I was softening the blow. I am afraid we will see just how much damage a modern superpower without a moral compass can do, to itself and everyone else.

(Thanks to Atrios at Eschaton for the EB link; that's why I read you, Atrios.)


  1. When the WSJ writes about commodity prices, they aren't using some kind of code for oil. They're talking about wheat, corn rice, soybeans, etc, which are in fact commodities. They're food that people eat, but demand for them is also driven by meat production for Chinese that can afford more meat, and subsidized ethanol.

    Higher oil prices do make food production more expensive, but even there Iraq isn't the only, or even necessarily the primary culprit. Increased demand from China is one factor, and so is the inability of places like Russia and Venezuela to keep pace with the demand.

  2. Anonymous11:46 am


    If I am understanding your post correctly the reason for the increase in world oil prices is the US invasion of Iraq. In effect, you are saying the uncertainty caused by this invasion has caused the increase in oil prices.

    I wonder how much of the current oil price you attribute to uncertainy, as opposed to increasing demand. Here is a link

    to an excel spreadsheet prepared by the US department of Energy, showing world production and demand in summary form.

    World production increased from 79.6 mbpd (million barrels per day) in 2003 to 84.6 mbpd in 2007. Demand increased from 79.6 to 85.5 mbpd. Demand in the USA and the rest of the OECD is essentially flat, with all of the increase coming from China - increase of 2.1 mbpd and the Non-OECD countries 3.1 mbpd (this would include India).

    Iraq produces something like 1.8 and exports 1.3 iirc.

    It seems to me that the price of oil is more a function of ever increasing demand, and lagging production, rather than uncertainty over Iraq (who's production has returned to pre-war levels, I think).

    Certainly the Chinese desire to buy into Alberta oilsands projects is well known out west here.

    Ian Schofield

  3. The price of oil from particular oil fields varies tremendously, according to type, extraction method, extraction costs (e.g. wage rates in the locale), location, and shipping. Canada's vast reserves are overwhelmingly expensive oil, and can effectively only be exported to one customer, the United States (there is not even a pipeline to Eastern Canada). Most reserves suffer these cost disadvantages to varying degrees, in relation to Gulf oil, which is overwhelmingly the cheapest to produce and move. For this reason, Saudi Arabia, the Gulf States, Iraq, and Iran's production has been the chief determinant of oil prices, despite the existence of large reserves outside of their direct control. Since 1982, the Saudis have withheld all detailed well and reserve data, so it is rather difficult to judge their productivity in relation to reserves. Nobody seriously doubts that it is the Saudi monarchy that determines OPEC policy, assigns quotas to the gulf producers, and Iraq was consistently assigned a "cut" far below it's potential production, an arrangement that Saddam Hussein chafed under, and attempted unsuccessfully to wriggle out of. Attempts to seize the Iranian fields by war did not succeed, and the seizure of Kuweit was punished spectacularly.

    It was precisely because of this situation that the Bush administration was able to sell the idea of the Iraq invasion to several key constituencies in the U.S. A troop of Neoconservative activists vigorously promoted the notion that Iraq's oil industry would be "privatized", and that a multiple, competitive ownership of Iraqi production would break OPEC's stranglehold on oil prices. A dog-and-pony show of doing this was maintained in the first months after the invasion, then, abruptly, all its administers were sacked, and the original State monopoly was re-imposed, restoring, in fact, many key administrators from Saddam's regime.

    Between between early 1998 and the middle of 1999 OPEC production dropped by about 3 million barrels per day and was sufficient to move prices above $25 per barrel. Russian production increases dominated non-OPEC production growth from 2000 forward and was responsible for most of the non-OPEC increase since the turn of the century. In 2001, increases in non-OPEC production put downward pressure on prices. OPEC once again entered into a series of reductions in member quotas cutting 3.5 million barrels by September 1, 2001. The 9/11 attack triggered a plummet in world oil prices. Given the political climate, OPEC delayed additional cuts until January 2002. It then reduced its quota by 1.5 million barrels per day and was joined by several non-OPEC producers including Russia who promised combined production cuts of an additional 462,500 barrels. Oil prices moving into the $25 range by March, 2002. By mid-year the non-OPEC members were restoring their production cuts but prices continued to rise and U.S. inventories reached a 20-year low later in the year. OPEC increased quotas by 2.8 million barrels per day in January and February, 2003. OPEC has for several years depended on a policy that amounts to world inventory management. Its primary reason for cutting back on production in November, 2006 and again in February, 2007 was concern about growing OECD inventories. Their focus is on total petroleum inventories including crude oil and petroleum products, which are a better indicator of prices that oil inventories alone. A glance at sweet light crude price charts shows a spectacular increase in world prices exactly like the one during the infamous OPEC embargo in

    It is not uncertainty in Iraq that has influenced the price, but the certainty that Iraqi oil production would continue to be managed by OPEC. The rate of Iraqi oil production has settled at 2.4 million barrels per day, according to its state oil agency. It was 2.6 million just before the invasion. Iraq's production is exactly what it was thirty years ago.

    The growth of Asian demand was not something that occured suddenly, as a big surprise. It was the central concern of all oil producers, though many of them could only benefit from it if OPEC maintained its restraint in the Gulf's supply. Alberta can only sell its oil to the U.S., where demand is flat, U.S. exported oil is largely sold on the spot market, and ultimately the prices commanded by both remain high only if the far east's supply continues to be rationed by OPEC. It is Europe, which has significant production, aimed at internal EU use, not export (like Canada's). and can import from both North Africa and Russia, that has the most room to manoeuvre in the current situation.

    It is hard to escape the conclusion that the invasion of Iraq was the most significant variable in determining the current high price, since it produces high-quality oil in the most advantageous location with lowest shipping costs, and yet produces only a very small percentage of what it could. The Bush family, and associated hangers-on, are closely tied to the Saudi royal family, and their personal interests clearly benefit from OPEC continuing to restrain production.

  4. Phil adds:

    "during the infamous OPEC embargo in "

    should read

    "during the infamous OPEC embargo in 1974."

    and of course "Kuweit" should be "Kuwait"

    My analysis of the causation is pretty much the same as that which
    circulates among analysts within the oil industry. The only difference is that the industry analysts do not express disapproval, or take any moral
    considerations into account.

    In the industry itself, nobody questions that OPEC is practicing this kind of inventory management, and nobody doubts that OPEC can trigger huge increases by leveraging relatively small amounts of production (the 1974
    embargo was accomplished by only taking out only %7 of their production). The chief complaint is that the Saudis consistently "overshoot the mark" and accomplish their aims with excessive "jerks". Industry analysts don't refer to any "inability to keep up with demand", since most of the key
    players are keeping production below potential levels which are relatively easy to achieve, and they don't refer ethanol diversion as anything but a minor, slow-acting factor on world prices. China's rising demand has been
    charted ahead of time throughout the decade, and the Saudis alone would have had no trouble supplying it, if they had wished to.

    It is unnecessary to construct elaborate and arcane conspiracy theories, when the consensus of serious analysts within the industry presents this view.