Historical overview of the impact of global oil politics on prices, investments and employment relations in the industry in Nigeria
The world economy needs energy to run and much of that energy is crude oil. This has therefore defined international relations since the discovery of the internal combustion and diesel engines powered by crude oil. In fact the history of international petroleum politics, and indeed international politics, is dominated by attempts to restrict supply of crude oil and maintain high prices by export dependent countries or attempts to maintain sustainable, secure access to crude oil at low prices by import dependent countries.
Consequently, international petroleum politics morethan anything else has defined the price of crude oil since the early 20th century to date. Unfortunately Nigeria, whose crude oil export currently accounts for 90 per cent of her total exports and roughly 75 per centof her consolidated budgetary revenues except through OPEC (which is largely controlled by the Arab member countries), have No effective hold on global crude oil politics and price, and so remains vulnerable to it vagaries. Lamentably, this global crude oil politics, which is largely responsible for some 60 per cent fall in crude oil price since June 2014 to date, has led to led to unprecedented contraction in Nigerian government revenues. It has also led to severe cuts in JV Programme Budgets, Operations and investments by the NNPC and International Oil and Gas companies (IOC), some $6bln cashcall arrears, new rounds of restructuring , divestments and heavy jobs losses in the Oil and Gas sector.
And ofcourse, a charged industrial relations atmosphere. It is therefore crucial that labour leaders understand the dynamics of the oil and gas industry to enable them anticipate the direction of the industry and help their organisations and members best cope with the associated or underlying challenges.
Keywords: Crude oil price, Global politics, Investment, Employment Relations, Nigerian Economy,Labour
“Follow the money” is the advice routinely offered to detectives in low-budget thrillers.For anyone attempting to understand the ebbs and flows of international politics, I offer a variant of that old line: “Follow the oil”.
Let me also thank your leadership team for inviting me to share my thoughts with you on this very important topic: The Historical Overview of the Impact of Global Oil Politics on Crude Oil Prices, Investments and Employment Relations in the Nigerian Oil and Gas Industry.
This topic is very significant and relevant to our understading of the forces at play in the oil and gas industry, especially in view of the fact that the price of crude oil which according to the World Bank accounts for close to “90 per cent of exports and roughly 75 per cent of the country’s consolidated budgetary revenues” has fallen by some 60 per cent since the second half of 2014.
This steep fall in crude oil price has led to severe contraction in government revenues and has once more exposed the vulnerability of the Nigerian economy to the vagaries of the international crude oil price and politics. For the oil industry in Nigeria, it has led to severe cuts in Programme Budgets, Operations and investments by the NNPC and International Oil and Gas companies (IOC). These operations and budgetary cuts have also led to new rounds of restructuring, divestments and review of strategy, redundancies and heavy job losses in the Nigerian Oil and Gas sector and an obviously charged industrial relations atmosphere.
The above situation is worsened by the fact that apart from the 60 per cent fall in the crude oil price, the Nigeria oil and gas industry has other daunting challenges, making its situation very precarious. In addition, key economic indicators does not show that Nigeria is howsoever prepared for this crises,which analysts forecast may last longer than originally thought!
As labour leaders and workers in the Nigerian oil and gas industry, the importance of our understanding of the events, policies and politics that shape our industry, and indeed the Nigerian economy, cannot be over-emphasised. This is because they will determine the fortune or misfortune of the industry, economy and by extension, that of our members and Unions. The fact is that:
“The history of the international petroleum industry is marked by attempts to restrict supply and maintain high prices. They include the Achnacarry (‘As Is”) Agreement; the abortive Anglo-US treaties towards the end of the World War II to set up an international petroleum council; and the system of allowables practiced, in the name of conservation, by various states in the United states, most notably in Texas, where the Texas Railroad Commission (TRC) was the lynchpin, setting monthly maximum allowable production levels which were then pro-rated among the producers”( Parra, 2004,p.89).
It is therefore crucial that as labour leaders, we seek to understand the dynamics of the politics in our industry and how that politics affects our industry, nation, unions and members.
History and overview of global oil politics
“Throughout the second half of the 20th century oil has been at the heart of foreign policy. The Suez Crisis in 1956, the 1973 Arab oil embargo, the consequences of the Iran-Iraq War in 1980, and the two Gulf Wars in 1990 and 2003 most visibly illustrate how oil has been implicated in international relations. Import-dependent states have been concerned with maintaining sustainable, secure access to oil at low prices, whereas oil exporting states, mainly in the developing world, have been concerned with balancing the desire to uphold prices and revenues while maintaining market share” Bromley,S. et al(2006).
The world economy needs energy to run and much of that energy is crude oil. Therefore sustainable access to crude oil has remained a key aspect of international politics and relations by all countries- importing and exporting countries alike. As noted by Bromley, et al (2006). Import-dependent countries are interested on how to maintain sustainable, secure access to oil at low prices, whereas oil exporting countries, are interested in balancing their desire to uphold prices and revenues while maintaining market share. This has formed a key basis of the relationship between these two categories of countries and their actions and inactions since the discovery of oil and its importance in powering the world economy became known.
It is important to note that besides the United States and parts of Canada, Subsurface mineral rights were and is still essentially the property of the State (Parra, 2004). This is also the position in Nigeria where the Petroleum Act gives the Nigerian State the right over subsurface mineral rights. Accordingly the governments of the Oil exporting countries must either explore and develop the oil and gas itself or enter into agreements with international oil companies to do so for them under various terms. In doing so, these governments expect to have a good share of the revenue from the oil and gas exploration and production activities.
After the Second World War and following the invention of the internal combustion engine and diesel engines, the international oil industry expanded speedily and world economies grew rapidly. World oil demand more than quintupled growing from 11mbd in 1950 to 57mbd in 1970(Parra). However much of the oil was produced by the seven oil majors christened: “The Seven Sisters” by Enrico Mattei, head of Italy’s national oil company, AGIP(Parra,2004,p6) . The Seven Sister are namely: the Standard Oil Company of New Jersey (later Exxon); the Standard Oil Company of New York (Socony, later Mobil, which eventually merged with Exxon); the Standard Oil Company of California (Socal, later renamed Chevron);the Texas Oil Company (later renamed Texaco); Gulf Oil (which later merged with Chevron); Anglo-Persian (later British Petroleum); and Royal Dutch/Shell. There was also the Compagnie française des pétroles (CFP) of France ( not part of the seven sisters). Together these companies controlled the international oil and gas industry and even price. By 1950, “nearly all the crude oil trading across international borders moved between subsidiaries of the seven major oil companies”(Parra). In fact from 1920 to 1973 the seven sisters were firmly in control of world oil. Barrett & Cormack (1983, p.28) observe that by 1972 the seven sisters:
“Were producing 91 per cent of the Middle East Crude Oil and 77 per cent of the free world’s crude oil coming from outside the United States. They had substantial influence on decisions concerning where and when to drill for oil, how much to produce, and what price would be charged for the oil.”
These eventually raised concerns among the Petroleum Exporting Countries who wanted to obtain more benefits from their crude oil deposits and wanted to have greater control. It was therefore not surprising that these countries namely Iraq, Iran, Kuwait, Saudi Arabia and Venezuela decided to form the Organisation of Petroleum Exporting Countries (OPEC) in September 1960. According to the OPEC Statute, the principal aim of OPEC is:
“To harmonise the petroleum policies of its Member Countries as part of its efforts to safeguard their interests. It further states that members of the Organization shall work together to ensure stable oil prices, secure fair returns to producing countries and investors in the oil industry, and provide a steady petroleum supply to consumers.”
Nevertheless, the seven sisters “continued to deal separately with each, often playing them against each other”. However the formation of OPEC was able to prevent between 1960s and 1972, further reduction in the posted price of crude oil.
Nonetheless, over a period of 13 years, OPEC had become stronger and was later joined by Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007).However Ecuador suspended its membership in December 1992 and rejoined in October 2007, Gabon terminated its membership in 1995 and Indonesia suspended its membership effective January 2009.OPEC currently has a total of 12 Member Countries.
Between 1973 and 1974, OPEC undertook three separate actions that clearly showcased its strength namely: The Arab Oil Embargo due to the Yom Kippur War; Production Cut and Substantial price increase.
Since then, global events and politics have had considerable impact on the price of crude oil. The economics law of free market based on demand and supply have been severally manipulated by politics and global events aimed at putting pressures on demand or supply depending on the interest of the political actors.
Unfortunately Nigeria, except through the collective efforts of OPEC (which is mainly controlled by the Arab Member Countries), does not have any effective hold on global oil price and so is essentially a price taker and vulnerable to the vagaries of global oil price and its politics.
Global politics and crude oil price
“Politics still shapes the oil price. Many states that depend on low-cost oil exports for revenue, such as the United Arab Emirates and Iraq, will face long-run budget challenges if prices remain depressed near their current $50 a barrel”( Levi,2015).
The two charts below show how world events and global politics have impacted on the price of crude oil. The first chart which is from Goldman Sachs shows the History of Crude Oil price and the key world events responsible for the price from 1862 to 2015.The Second chart which is from the US Energy Information Administration (EIA) corroborates the first chart and shows the impact of global politics and events on the price of Crude oil from 1970 to 2015.
It is my considered view that explaining the events indicated in these two charts and their impact on crude oil price will provide a succinct overview of the history of global politics and crude oil price. This to me will satisfy the major thrust of this part of the paper which is essentially tracing the correlation between Crude Oil prices and major political events around the globe.
Please take note that the base prices are different as the first chart (Goldman Sachs) is based on crude oil prices in 2013 US$ and the second chart (EIA) is based on 2010 real US$.
Several events such as US Civil war raised commodity prices from 1862 to 1865. Prices fell sharply in 1864. However fluctuations in the US drilling led to a boom-burst period between 1865 and 1890. It is however important to note that the price of crude oil doubled between 1914 to 1918 due to World War I. By 1920 the rapid adoption of automobile gave rise to increased crude oil price due to increased crude oil consumption leading to the popular ‘West Coast gasoline famine’. However the onset of the Great depression led to fall in demand for crude oil and fall in crude oil prices. There were however marginal gains in the prices during the World War II.
The post World War automotive boom 1947
The end of the Second World War II was the beginning of post-war reconstruction and industrial boom. This period also witnessed the automotive boom. This led to significant increase in the demand for crude oil and shortages of supply leading to significant increase in crude oil price.
The Suez crises
The first major crisis after the Second World War that impacted global Oil prices was the Suez Canal crises in 1956 which arose out of Franco-British imperialism coming in contact with the rising Egyptian nationalism under the then President Nasser. The crisis started when the then Egyptian President Gamal Abdel Nasser, nationalised the Suez Canal on 26th July 1956 raising fears that the Egypt would control the canal and the supply of Middle East oil to the Western World.
In response, Britain, France and Israel invaded Egypt. However the invasion did not make Britain and lis allies regain control of the Canal. As Bamberg (2000) observed “no event in the post-war years exposed more starkly the decline in Britain’s power and Western Europe’s growing dependence on Middle East oil than the Suez Canal crisis”. The Suez Canal crises marked the first international crises in the global oil politics. The crises however led to some 10 per cent decrease in crude oil supply forcing crude oil price upwards.
The Yom Kippur war and the Arab oil embargo
Enter the Yom kippur war, which was basically an extension of the Arab – Israeli imbroglio with its various alliances and consequences. However, at this point because of the now growing fervour amongst Arab nations against the West and Israel, the Oil producing nations of the Middle East presented a more united front against Western imperialism in their quest to subdue Israel.
Oil was again, one of the most portent tools with which the war was fought. Though Arabs largely lost the battle in the field, they however were able to rally round and form a cartel of Oil producers with which they were able to enforce their political desires.
This came in form of Oil embargo against the West. The embargo created serious supply gap in the international market and spiked up the price of Oil from 1973 in combination with the emergence of OPEC at this time. This regime of price increases continued until late 70s when it started experiencing a downward trend as indicated by the downward graph in 1979 until the Iranian revolution of that year.
The Iranian revolution
The Iranian revolution, which as far as we are concerned is an offshoot of the growing Arab nationalism which was spurred by Nasser’s Suez nationalisation, dethroned the conservative western backed government establishing the Islamic republic.
The immediate effect of this on Oil prices was an upward spike as one of the governments which was backing the West in that region had been dethroned and Western Oil interests nationalised as a consequence. Oil prices were buoyed on the wings of this revolution and as consequent steps were taken by the West to contain the Iranian revolution.
The Iran – Iraqi war
As the global oil prices crested around the U$70s per barrel in the early 80s, the Iran – Iraqi war ensued subsequently pushing the price of Oil into the U$80/barrel range. It has to be remembered that this war was as a result of the desire of the West to contain the Iranian revolution and ensuring that it spread into other parts of the Middle East is minimised.
Saddam Hussein was therefore armed and spurred into battle against the Iranian regime creating instability in that region and shutting off some of Iranian Oils temporary from global supply. This peaked at the 80s until the global economic recession of the 1980s set in.
As a result of the global economic recession, there was a glut of supply in the global market as a result of weakening demand effectively putting a downward pressure on Oil prices continuously from the early 80s to late 80s. Prices plummeted from the its peak down to below U$20 per barrel wrecking the economies of most of the Oil dependent nations as fiscal insufficiency became the order of the day and this included Nigeria as one of the worst hit nations.
The US price control
The US government in its bid to stem the negative impact of the Oil embargo and the rising influences of OPEC on global Oil prices on its domestic economy and the lives of its citizens established a mechanism for controlling the effective price of Oil within the American market. This was through a series of taxes and incentives.
The immediate impact of this disguised subsidy was that American refiners and consumers were not paying the exact cost of oil based on existing international prices of the crude Oil prices. In essence, the cost of crude in the US was always lower than that of the International market effectively cushioning her citizens and companies from the full impact of the increasing Oil prices.
This continued till around 1985 when both prices converged as could be gleaned from the graph.
Saudis abandoned swing role
Hitherto, Saudi Arabia had played the role of a swing producer directing the prices of Oil by either increasing supply gaps or withholding supply to increasing prices. This it was able to do because of the quantity and character of its Oil as a leading producer and exporter.
The role of Saudi Arabia which was used to influence prices either way helped in stabilising Oil prices but as prices plummeted, cutting down supply will harm Saudi economy further reducing its market share and give advantage to perceived enemies of the Saudi nation so, in 1987, it abandoned this role effectively at this time leaving Oil prices low at around the U$30 per barrel mark until another event in the gulf changed the prices of global Oil.
The Gulf war
Iraq had accused Kuwait of allowing it to be used by the West to destabilise Oil prices and having had its territorial ambitions focused on some Kuwaiti territories, Saddam Hussein invaded and occupied Kuwait in 1991. The international community gave him a mandate to leave Kuwaiti territory but his refusal led to the Gulf war.
Iraq was as a result chased out of Kuwaiti territory by the US supported by other Western powers. The period of this occupation and subsequent putsch by the Western powers created serious instability in the global supply of Oil and this led to the swing that is noticed in the graph as prices jumped to above U$50 Dollars for the first time in a long time.
In Nigeria, we call it the Gulf Oil windfall of which its proceeds grew wings and have become a subject of unending inquiry in Nigeria even though the Pius Okigbo Report had made it findings known on this matter.
OPEC 10 per cent quota increase and Asian financial crises
Starting from 1993 to 1998, two major global factors influenced the downward movement of prices in the international Oil market; the increase of export quota for OPEC members and the beginning and deepening of the Asian financial crises.
As a result of internal pressures from member countries and because of fiscal needs and a desire to capture more of the crude Oil global market share, OPEC increased members’ export quota by 10% across board. The Asian financial crises also began and spread and since the Asian tigers were the drivers of world economic growth at that point and jointly leading consumption centres for global Oil thus demands, economic recession in that region meant industrial crises impacting negatively on the demand for industrial inputs of which Oil is one of its major drivers.
These have immediate implications for supply of crude which increased in the market thus depressed price subsequently as demand also began to deep as a result of the financial crises. Twin forces were therefore unleashed on the market simultaneously – upward in crude supply as a result of increased quota coupled with downward demand as a result of Asian financial crises.
Each of these on its own is capable of forcing down prices but when taken together, the downward spiral became very significant as prices of international crude dipped to below the U$10 per barrel mark in 1998.
Series of OPEC cuts (4.2 million b/d)
Beginning 1999, OPEC began a series of export cuts to shore up prices of crude in the international market. It was able to cut a total of 4.2mb/d of crude from the market.
This manoeuvring pushed up prices and coupled with the now recovering Asian economies, international prices of crude began to pick up and began the upward spiral buoyed by other factors as the coming into play of the 9/11 attacks in the US with its consequences – Afghan and Iraqi wars which took away large volumes of Oil from the market pushing Oil prices further up.
Production ramped up but with increasing consumption, OPEC spare capacity fell which created further panic within the market pushing prices up to above U$100b/d by 2008 and beyond when the global financial crises began to set in and began to put downward pressures on prices again. This lasted till 2011 when the Arab spring and its spiralling consequences created the Libyan uprising which forced up prices again keeping prices between U$125 and 140 until it began its present downward journey.
From the charts so far discussed and the explanations, it would have become very clear that the price of crude Oil which Nigeria so much depends on for almost 90 per cent of her total export earnings is influenced largely by global politics and events. Nigeria unfortunately has not become strong enough to make major impacts on global politics and cannot therefore effectively pretend to control the nuances of global oil prices.
It is therefore a receiver of whatsoever outcomes is foisted on it by global political power houses. The best sensible course of action for any nation that finds itself in such a situation is to move away consciously from this dependence disentangling itself from the destructive yoyo which its swings can cause to its developmental trajectory. Whatever you cannot reasonably control becomes a stochastic variable which is very difficult to deal with in every form of planning.
• Onuegbu is the state Chairman, Trade Union Congress of Nigeria (TUC), Rivers State Council
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