Wednesday, February 3, 2010

Remembering the 1970s' Energy Crisis

This week I discovered an interesting International Monetary Fund webpage that provided a brief history of the oil crisis of the early 1970s. I quote from one of their pages:
"The fourth Arab-Israeli conflict broke out in October 1973. Over the next three months, the price of crude oil shot up 300%! Global energy and financial crises ensued." [1]

It was all very simple, according to the IMF. Anger towards the Netherlands and the Unites States because of their judged undue level of sympathy for Israel and also (as mentioned later) because the price of oil had not risen in line with other world commodities at the time.

This version is somewhat at odds with actual events, however. I was aware in the '70s that Western governments (in particular) justified the then huge spikes in the price of oil by repeatedly making the claim that world oil shortages existed and we'd all better get used to it.

Decades of wasteful energy consumption follwed. There was almost a complete lack of effort by government and industry to limit the public's consumption of oil. I was left a permanent skeptic.

Many other people were suspicious of events even at the time.

Richard J Barnett and Ronald E Muller, writing in 1974 said:

“Between 1970 and 1973, even before the Arab boycott and the official proclamation of the Energy Crisis, the price for crude rose 72%. In some cases the price of natural gas has risen 200% since 1970….Although consumption in the United States has been cut back by government programs, blackouts, brownouts, service-station shutdowns, winter school closings, and rationing, demand, both US and worldwide, far outpaces available supply. This situation is a direct consequence of some of the structural changes in the world economy to which we have alluded. The decisions about production, pricing, research and development, and distribution in the energy field have been substantially in the hands of the global energy companies, the “seven sisters” – British Petroleum, Gulf, Mobil, Shell, Texaco, Exxon, and Chevron (Standard Oil of California). (Purely domestic energy companies account for approximately one-third of annual US energy consumption.) For many years Exxon and other global energy companies have been earning substantially higher profits abroad than in the United States. Because 300 billion barrels of the proved 500-billion barrel world oil reserves are in the Arab countries of the Middle East, the companies have been concentrating their development activities there. Because of their oligopolistic control over the world energy market, they have held the commanding power to decide how much oil is produced, where it shall go, the price to be charged, and where, through transfer pricing techniques, to declare their profits. The power of the global energy companies in the US economy is based on a combination of special privileges, uniquely favourable oil concessions in foreign countries backed by the power of the US government in the name of “national security.”….[The major oil companies – the “seven sisters” have] near monopoly control of oil reserves, transportation, refining and marketing facilities…..Despite recent nationalizations and the rise of a few European and Japanese companies, 8 global companies, 5 of them US-based, still control 48 percent of world production and a degree of vertical integration and market sharing permitted no other industry. Immunity from antitrust prosecution has been justified on “national security” grounds….Because the petroleum companies have had near-monopoly power over production and distribution, they have, for much of the last generation, been able to set world prices at will. This explains, in part, their extraordinary profits….the annual rate of return on fixed assets invested in the Middle East rose from 61 percent in the 1948-1949 period to 72 percent a decade later….costs are much lower in the Middle East…..Because the information about oil reserves, real costs of drilling and distribution, and their own long-range strategies is in the exclusive hands of the companies, it is impossible to know the extent to which the celebrated Energy Crisis that began in 1973 is real or manipulated. There is considerable evidence, as committees of Congress began to discover in 1974, that available supplies are far more ample than the long lines at gas stations and “crisis messages” from the White House would suggest. Indeed, fuel stocks in the US were at an all-time high in 1974….Some knowledgeable students of the petroleum industry such as former Occidental executive Christopher Rand and MIT professor Morris Adelman offer impressive evidence that there is no shortage of fossil fuels in the ground and that indeed, in Rand’s words, “the inventories of the world’s available fuel have been increasing rather than diminishing, even when measured against the annual rise in the rate of the world’s consumption.” The suddenness with which lines at gas stations appeared and disappeared, the puzzling display of sudden anger and sudden friendship from the Arab boycotters, and the quick jump in gas prices and oil-company profits all within a few short winter months in 1974 aroused widespread public suspicion that the Energy Crisis was stage-managed….The extent to which the crisis was the result of conspiracy may not be known until historians are given access to the oil companies’ equivalent of the Pentagon Papers….The worldwide energy crisis is not a problem of absolute shortages of energy sources. It is a political crisis over who shall control these resources; who shall decide where, when, and how they are to be distributed; and who shall share in the enormous revenues….as Professor Adelman and other petroleum experts [argue] that there is no worldwide shortage of recoverable oil in the ground, but it is an academic point if those who control the reserves will not permit them to be exploited fast enough to meet rising demand. While the US-based oil companies now issue standard warnings about the Energy Crisis, they are engaged…”in a massive exercise in picking the pocket of the American consumer to the tune of billions a year.”[2]

In somewhat of an understatement Barnet and Muller observe that these extreme hikes in the price of oil had created a dollar glut. They say that this, "no less than the [so-called] scarcity of oil threatens the stability of the international structures for the creation and maintenance of wealth." [3] Poor and oil-dependent countries - the first 'subprimers' were pushed into extraordinary levels of unsustainable debt in order to recycle this artificial liquidity glut of petrodollars. They defaulted in quick succession, more dollars were lent back to them and the global Ponzi game continued to our current financial and ecological breaking point.

Governments around the world became dependent upon another global cartel to be able to continue to pay for expensive oil. The bankers of Wall Street were the second powerful oligopoly exacerbating global imbalance. As Grazia Ietto-Gillies once stated, these “Multinationals are [and were] everywhere except in economic theories and economics departments.”

[1] Reinventing the System (1972-1981)
https://www.imf.org/external/np/exr/center/mm/eng/mm_rs_01.htm
OPEC Takes Center Stage

[2] Richard J Barnet and Ronald E Muller, ‘Global Reach – the Power of the Multinational Corporations’ Simon and Schuster, 1974. Pages 218 – 224.

[3] Richard J Barnet and Ronald E Muller, ‘Global Reach – the Power of the Multinational Corporations’ Simon and Schuster, 1974. Page 226.

19 comments:

Anonymous said...

Much more to it -

-----------------
"So long as OPEC oil was priced in US dollars, and so long as OPEC invested
the dollars in US govt instruments, the US govt enjoyed a double loan. THe
first part of the loan was for oil.The govt could print dollars to pay for
oil, and the American economy did not have to produce goods and services in
exchange for the oil until OPEC used the dollars for goods and services.
Obviously, the strategy could not work if dollars were not not a means of
exchange for oil.

"The second part of the loan was from all other economies that had to pay
dollars for oil but could not print currency. Those economies had to trade
their goods and services for dollars in order to pay OPEC. Again, so long
as OPEC held the dollars rather than spending them, the US received a loan.
It was therefore important to keep OPEC oil priced in dollars at the same
time that the govt officials continued to recruit Arab funds...

"The Saudis...had the greatest proportion of dollar denominated reserves in
OPEC. This meant that their reserves were diminished by the [post
12/77-rb] depreciation of the dollar (compared to the basket of their
imports)> But it also meant that they had the most to lose if a shift by
OPEC to a basket of currencies [note: urged by Kuwait!!!--rb] threatened
intl confidence in the dollar. Having agreed to invest so much in dollars,
the Saudis now shared a stake in maintaining the dollar as an intl reserve
currency...

[David E Spiro, The Hidden Hand of American Hegemony:Petrodollar Recycling
and International Markets. Cornell University Press, 1999.]
-----------------------

"In an attempt to continue the recruitment of Saudi funds, and in
competition with other industrial powers, the State and Treasury Depts went
to extraordinary lengths to prevent the Congress from gathering infomration
[on the Saudi purchase of T-bills and various other instruments--rb]. The
secretary of the treasury even went to the trouble
of making sure the CIA remained secretive [!]. It was this secrecy not
accorded the investments of any other nation, tha tled the Commerce Dept to
complain that it was unable to compile accurate data on either foreign
investment in the US or its balance of payments." p. 126.
-------------------------

I could not recommend this book more highly. I had been hoping that a
Marxist would have written such an analysis long ago, though the late Eqbal
Ahmad made many suggestions in this direction.

Yours

Anonymous said...

for your pleasure Brenda,

[Historical and contemp} Documents on the International Energy System

J.

acuvue oasys rebates said...

Ah yes, the energy crisis of the 70's. You think we learned anything from that?

Anonymous said...

"You think we learned anything from that?"

sure - new and improved unequal exchange w/most of rest of world

dovetailing w/deindustrialization, progressive super exploitation here and abroad and rise of the new finance capital with its neoliberal ideologies.

Juan

Brenda Rosser said...

"The govt could print dollars to pay for oil, and the American economy did not have to produce goods and services in exchange for the oil until OPEC used the dollars for goods and services. "

Thanks, anonymous. "Hidden Hand of American Hegemony" sounds like a worthwhile read.

Adding to the story. Many times the production of goods and services - although performed by American corporations - did not occur in the US . Very frequently the money didn't change 'hands' at all. Petrodollars, tended to stay lodged in the Wall Street bank accounts of US TNCs. With no apparent attempt by members of Government and Treasury to account for or measure the transactions/liquidity.

There's an interesting reference in John Perkin's book 'Confessions of an Economic Hitman':

"David Holden and Richard Johns, in their 1981 book ‘The House of Saud: “The Rise and Rule of the Most Powerful Dynasty in the Arab World’describe how Saudi oil money was used to hire American firms to industrialise Saudi Arabia with the overall management and fiscal responsibility delegated to the US Department of Treasury. The commission so set up was “independent to the extreme”. “Ultimately, it would spend billions of dollars over a period of more than twenty-five years, with virtually no congressional oversight. Because no US funding was involved, Congress had no authority in the matter, despite Treasury’s role. ”

Barnet and Muller have a prophetic paragraph on page 226 of their book ('global reach'):

The unanswered question now plaguing the world's bankers is whether the international monetary system can find any way to recylce the extraordinary foreign-exchange holdings of the oil-producing states. In the next few years they will continue to be absorbed in Eurodollar deosits and US Treasury bills, but, as a senior Chase Manhattan Bank executive predicts, with a few years "there will be severe difficulties" unless there are "structural changes" in institutional markets. Thus the glut of dollars no less than the scarcity of oil threatens the stability of the international structures for the creation and maintenance of wealth."

Thanks for the link to the docs on the international energy system btw.

Juan,
'Super exploitation' about describes it. A huge global build-up of debt being one of the expressions of it. Now that nations and people can't borrow any more to fend off immiseration how long will we tolerate the sovereignty of the global corporations and their appointees in government?

Anonymous said...

Brenda,

'Global Reach' remains an excellent popular exposition but was, at time of publication, somewhat dated in its treatment of control over oil production and prices, e.g., 'Seven Sisters' had effectively lost control.

The sequence of price regimes is better outlined in the attached from Oxford Institute for Energy Studies:

Oil Markets and Prices

There have been marginal changes since the article's 2000 publication date but the above short piece provides more than enough to 'see' which segment of global capital has been in control since the 1986/7 breakdown of OPEC administered pricing.

Juan

Anonymous said...

(If this posts as anonymous, because I am struggling with 'password' problems, this is rl love trying to contact planet Earth)
About 2 years ago I worked on a nat. gas rig for about 16 hours in North Texas (Bartlett Shale). The drilling was impeded by some unknown obstruction about 7000 feet down. A consultant was brought in due to the unusual nature of the problem. He was in his 70s and said to be one the leading experts in the world. He told me that there are still vast quantities of oil in West Texas. He said that advances in technology would now make it possible to extract very substantial amounts of oil from the sites that were once thought to played out, and, that modern subterranean surveys showed that many of the wells had been too far apart. He was a cynical old grouch.
Until recently, I lived in Cleburne, Texas. The entire area has become tied to nat. gas prices. When prices are up, the amount of economic activity surges, it is in fact possible to estimate gas prices by traffic levels. When gas prices are up tanker trucks are scurrying everywhere with loads of saltwater. I know a truck-driver who worked 126 hours in a 7 day period, but the when gas price is down, lots of 'vacation' time. Supply is completely manipulated and the geologist who did the subterranean survey on our property said that the Bartlett Shale would still be productive in 100 years. (the well we were part of was a bit of dud[lots of luck involved], we did however get a 'sign-on' bonus of $5600. for 7.5 acres)

Juan,
I was in Guatemala just after the quake in Mexico City (1985?), but I do not recognize the name of the Bishop who you mentioned. But then I don't remember what year I was there either???
Thanks for the info above and the book reference. Good stuff.

Brenda,
Yet another excellent post.

~ ray l love

Anonymous said...

Is anybody out there?(rll)

Does this petro dollar glut lead to the IMF encouraging poor nations to hold $$ assets as criteria for credit status?

Anonymous said...

it leads to the Gulf Cooperation Council [GCC: UAE, Kuwait, Saudi Arabia, Bahrain, Oman, Qatar] being one of the largest purchasers/holders of U.S. debt assets, i.e., it plays a significant but mostly unmentioned role in U.S. credit status

"The GCC total dollar portfolio is likely significantly bigger – over half of the estimated $2 trillion managed by public and private sector GCC investors. The discrepancy can be explained by the GCC tendency to buy through intermediaries. However, it seems likely that the use of local intermediaries has increased. The flows from the GCC have been higher in the last year. But again, the currency pegs may constrain the GCC to dollar purchases." [Ziemba, CFR, 7/17/09]

Juan

ril, monsignor gerardi was in quiche then, later 1990s, assasinated in guate by the same bunch of sobs the u.s. assisted during all the many decades of rolling terror.
i was there 1976-1980 but worst was slightly later.

Anonymous said...

(this is the not anonymous, Anonymous, ray l love)

Juan,
In my previous comment I meant to say that the petro-dollar glut could have lead to the Washington Consensus efforts that encouraged developing nations to hold $$. It occurred to me that demand for dollars could be sustained by locking up dollar related assets. Stiglitz, in Making Globalization Work,(pg.251), says this: "To see the magnitude of the problem, note that the world's economies hold more than $4.5 trillion in reserves, increasing at a rate of 17 percent a year. In other words, every year some $750 billion of purchasing power is removed from the global economy, money that is effectively buried in the ground."
So, what I'm was getting at was a question of demand dynamics. In an effort to create demand for the dollar, dollars as reserves are perhaps providing some stability, but at a cost that continually must remove wealth from the global system. Thus exchanging demand for dollars, for global aggregate demand for goods and services. This of course suggests a viscous circle. Stiglitz again:" The reserve country can be thought of as exporting T-bills; but the export of T-bills is different than the export of cars or computers or almost anything else: it does not create jobs. That is why countries whose currency is being used as a reserve, and are exporting T-bills rather than goods, often face a problem of insufficiency of aggregate demand,(pg.252)."
My question then, is, do weasels chase their tails? ~ray

Anonymous said...

Brenda,
Why do you, while living on the bottom of the planet, starved for gravity I suppose, have the same last name as Barkley. A person who, I think?, lives in a place with proper gravity, but also a glut of smug? (Bay area?)

Anonymous said...

yes, Ouroboros

but i'd say the demand problem - the realization problem - is better assigned to capital's structural inability to create a sufficiently large/well paid working class,,,a problem that rises from inherent contradiction between dependence upon productive living labor on one side and struggle to reduce these to minimums on the other.

much of the credit system's expansiveness can be seen as the attempt to bridge, or mitigate, the above while, same time, such mitigating must - transcyclically - become an undermining process.

juan

Anonymous said...

(not anonymous-ray)

Jaun,
I agree. Although I see it as the demographic dividend eliminating the inter-dependence between workers and investors in the US. This as a prerequisite of globalization that has slowed upward mobility in the US and so limited the 'credit system's expansiveness' and the 'attemp to bridge'. ~ray l love

Barkley Rosser said...

Anonymous (how many of you all are there?),

A common distant ancestor whose identity has not yet been determined.

Oh, and this Glut of Smug lives in Virginia near the East Coast, not the Bay area, although I managed to get out of there just prior to the latest blizzard, to go to Madison, Wisconsin where I am visiting my mother.

Anonymous said...

Barkley,
Juan and I (ray l love) are the only ones here using the anonymous tag.
I did not say that you are a glut of smug, I applied that clever term to the Bay Area, and aptly so.

Brenda Rosser said...

Why do I have the same surname as Barkley?
We both have father's with a 'Rosser' name. In my lifetime, I have only met one Rosser who was not traceable to my great great grandfather. Barkley is that 'Rosser'.

I've since discovered there are quite a few 'Rossers' in the world, not as rare as I thought they were.

I met Barkley online when doing a search for my name and it was he who introduced me to other members of our extended global family. Huh! just a coincidence that we share a similar disposition and interest in economics, politics... have the same skin colour etc. ;-)

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