Past Its Peak

Robert Vitalis

  • Crude World: The Violent Twilight of Oil by Peter Maass
    Allen Lane, 276 pp, £20.00, October 2009, ISBN 978 1 84614 246 8

In 1905 a British journalist called James Dodds Henry travelled to Baku, an enclave on the southern frontier of the Russian Empire that had recently become the centre of the world oil industry. ‘If oil is king, Baku is its throne,’ he wrote in Baku: An Eventful History. But the Russian industry was even then beginning a precipitous decline following a series of crippling strikes in the oilfields led by a young Joseph Stalin, and rebellion was spreading across the Caucasus. Dodds wrote of the waves of ‘inter-racial savagery’ between Muslim Tatars and Armenian Christians that had laid waste to the refineries and the surrounding boom town.

Crude World is Peter Maass’s account of the violence, tyranny, poverty, environmental degradation, corporate malfeasance, corruption and state failure that seem to be fuelled by oil. By these lights, what happened in Baku might be taken as confirmation of the ‘resource curse’ hypothesis. This is a statistical correlation that economists and political scientists began to explore in the 1980s: it holds that states whose economies are based on the production and export of oil or other mineral resources grow less fast and repress their populations more than other states. Maass uses the idea loosely to organise his often riveting account of politics in oil-producing countries (including Equatorial Guinea, Nigeria and Ecuador) and the pressures on Western companies fighting over a shrinking portion of the world’s reserves – and breaking the law as they do so. There are also accounts of the few oil producers that don’t fit the formula of kleptocracy and brutalisation quite so neatly – among them, Saudi Arabia, Russia and Venezuela.

Oil doesn’t just make certain societies more repressive and corrupt than others. According to Maass, it goes a long way towards explaining recent wars, both conventional and unconventional. Saddam Hussein marched into Kuwait in August 1990 in a bid to ‘control’ more of the stuff, and the United States overthrew him in 2003 as a result of its leaders’ own obsession with securing unimpeded ‘access’ to this ‘inebriating crude’ – which also led them to exaggerate the threat of Iraq’s weapons programme. Apparently they weren’t ‘thinking straight’. The Saudi rulers weren’t either: having paid billons to aid ‘the global spread of fundamentalism’, the money has come back to haunt them and the West in the form of violent jihadism.

The best chapters combine Maass’s own reporting with the work of other investigative journalists. Ken Silverstein, for example, the Washington editor of Harper’s, first exposed Teodoro Obiang’s use of the Riggs Bank in Washington, which stashed Equatorial Guinea’s royalty payments from Exxon in accounts controlled by Obiang himself: ‘Imagine a company making its tax payment not to an account controlled by the IRS but to … Barack Obama.’ Maass also makes good use of US court records, although in the case of James Giffen, the middleman who helped Chevron win contracts in Kazakhstan and was indicted for kicking back $80 million to President Nazarbayev and other officials, the paper trail was abandoned on grounds of national security after Giffen revealed that he was a CIA asset. In another case the trail takes Maass to Odessa, Texas, where in 2003 a handful of oil towns charged Exxon, Chevron and a dozen other giant firms with defrauding them of royalty payments for more than a decade. Unfortunately, Maass drops the story – was there corporate fraud or not? – in his rush to move on to other schemes and further instances of the resource curse theory.

Maass points out in support of his theory that although South Korea has no oil and Japan only ‘minuscule’ reserves, both have emerged as economic powerhouses, while oil exporters such as Iraq, Iran and Nigeria lag behind. Unfortunately, the vividness of the example leads one to infer a connection that might not exist. Maass doesn’t refer to alternative statistical research that finds no evidence in support of the hypothesis, and he carefully avoids contradictory examples. Many economic historians believe that oil or other natural resource booms played a positive role in the economic growth, not just of Norway – the favourite outlier – but also of Britain, Australia and California (Louisiana and Texas did less well). Many of the countries Maass discusses were, to use his term, ‘dysfunctional’ long before oil was found there. Francisco Macias, who was elected president of Equatorial Guinea before independence in 1968, ‘turned into a mass killer’; it was a coup against him in 1979 that brought Obiang to power. Oil wasn’t discovered in the country until the 1990s. In other countries, there have been transitions not to dictatorship but to democracy in the midst of oil booms. Maass can’t be held responsible for all the wrongheaded thinking his book may encourage, but he might at least have considered the difference between correlation and causation.

There are factual mistakes, too, in Maass’s account, specifically in his discussion of Saudi Arabia, the area I know best. Osama bin Laden’s father, Muhammad, worked for the California Arabian Standard Oil Company for a short time in the 1930s, not the 1940s. Maass imagines the Saudi Bedouin encountering the first American oilmen being struck ‘by the colour of their skin’: racial identity seems unlikely to have mattered to the tribesmen. Maass claims that ‘the monarchy was known for piety and thrift’ under the first king, Ibn Saud, rather than for corruption, which allegedly came later. The Economist took a different view of a king who owed millions to Chase Manhattan Bank and Bechtel. In 1949 he received around $90 million from the oil companies, paid mainly in gold; it is thought that by November 1950 he had received another $70 million. Officially, these funds went to ‘raise the living standards’ of his people; in fact, all but 10 per cent, which he paid mainly to tribes to keep them quiet, went to the king, his immediate family and entourage.

Maass’s description of the ‘cosy and sleepy’ American-Saudi relationship in the 1950s and 1960s is just as hard to square with the facts: the CIA branded the kingdom a threat to US national security in 1956; in 1957, Americans protested over the visit of King Saud to New York and Washington; the Saudis closed down the first US airbase in the country in 1961; the Saudi oil minister, Abdullah Tariki, fought continuously with Aramco until he was ousted in 1962; and in return for a more accommodating stance vis à vis the oil company, the crown prince gained US assistance in heading off a military coup or two, the protection of the US air force against Egypt, and the first serious arms sales in 1965, a trade that would grow hugely in the 1970s and 1980s.

Maass thinks that relations were sleepy primarily because Saudi Arabian oil was ‘not even needed by the United States’. The problems only started, he argues, when the productivity of US oilfields began to decline. There was, however, plenty of potential demand inside the US for the Saudi oil, which was cheaper to produce, especially on the part of refiners and consumers who would have preferred to pay less to run their businesses, drive their cars and heat their homes. His account is missing a crucial detail or two.

Despite the claims in the 1940s that the US was running out of oil, and hence that the US oil giants should be given special favours for encouraging production in places like Saudi Arabia, the Eisenhower administration’s policy in the 1950s was to limit imports of Arab, and later also of Canadian, Mexican and Venezuelan oil in order to protect the profits of domestic producers from the effects of the availability of inexpensive oil on the world market. These controls remained in place until 1970, when a disastrous system of tariffs took their place. As US producers pumped more oil from existing fields, they hastened the peak in local production that Maass believes is now about to be experienced by the oil industry worldwide. The protectionism of the US helped drive Venezuela, Kuwait, Saudi Arabia, Iraq and Iran to form Opec to reverse the fall in their revenues. They managed this in stages, the most important being the takeover of private concessions from 1972 onwards.

The Nixon administration deserves credit for making the transition to the Opec era smoother than it might have been, by encouraging the price rises of the mid-1970s that are misleadingly attributed to the short-lived Arab boycott. If you don’t believe this, you need to explain why Nixon, instead of retaliating against the principal price-gougers, the shah of Iran and King Faisal, instead rewarded them with vastly increased arms sales, commissions on joint development and so on. The so-called oil ‘crisis’ (no more than an ‘inconvenience’ to the US, according to a recently unearthed memorandum to Henry Kissinger of December 1973) reduced the pain of the private oil giants a little: they lost the concessions that guaranteed their supplies of crude oil, but increased their profits on the oil they sold. At least until the Iranian Revolution in 1979, the price rise appeared to resolve the problem of potential instability in the Gulf in the wake of Britain’s decision to disengage from the region. It would also pay for all the arms purchases and base-building that ensured the budget of the post-Vietnam Pentagon remained high and secured the future of the US engineering and contracting industries.

The fundamental problem for the industry in the 20th century was the need to restrict the supply and distribution of oil and thus to secure its profitability. Eisenhower sealed off the US market, and Opec modelled itself on the Texas Railroad Commission, the public authority that controlled production in the US. Before Opec, the primary mechanism for creating scarcity had been the cartel of Western (Dutch, French, American and British) firms that competed with one another while simultaneously negotiating to divide up markets and control production. It wasn’t easy.

The US government became more involved in this rationing system after World War Two. According to the political scientist Timothy Mitchell, the wartime Roosevelt and Truman administrations began ‘a long relationship in which Saudi collaboration in restricting the flow of oil was organised as though it were a system for “protecting” the oil against others’.[*] Maass accepts the rationales offered by today’s governments at face value. Thus, the US government ‘tries to ensure that oil reserves are controlled by friendly governments and friendly companies that will extract and transport steady supplies of oil to us’; it supports American companies seeking crude contracts in order to create jobs, although in the case of oil curse countries the industry doesn’t produce enough jobs to make a difference; it guarantees profits (yes) ‘for America’ (no); the strategy ‘lowers the pulse rate of national security officials who worry about cut-offs by foreign companies, including European ones, that might be persuaded, for economic or political reasons, to ship their product to other countries or not ship it at all’; meanwhile, the US navy secures the sea-lanes ‘to ensure the safe passage of supertankers that deliver much of the oil we consume’.

Things aren’t so straightforward. Oil is the most actively traded commodity in the world. Friendly and unfriendly governments alike sell it to traders or directly to refiners. No oil state has ever opted to keep all its oil in the ground rather than sell it in return for the goods, services, prisons, palaces, weapons and so on that it buys. Nor can a producer or company shut down production to one country without shutting it down to all others. As the oil economist and enemy of the Opec cartel M.A. Adelman put it: ‘In a global market filled with buyers and sellers, everyone has access.’ Finally, the belief that a worldwide US military presence makes the oil market possible or smoothes its operation is a matter of faith – and nothing else.

Dire predictions in the 1920s, 1940s and 1970s that the world was running out of oil provided one justification for subsidising the firms competing for control of the crude reserves that secured their profits. In an industry in which concessions have virtually disappeared, the next best choice is an arrangement that guarantees oil firms a flow of new crude reserves, which raises their share price and positions them favourably vis à vis their competitors. It is an old story, but with the post-1970s twist that these new reserves have become harder to obtain: foreign companies have long been shut out of the main Persian Gulf markets and, if anything, competition has grown fiercer, as Maass points out.

The years of protecting against abundance may be ending. Crude World prophesies the twilight of the oil era: Maass subscribes to the peak oil hypothesis, whereby the world industry has reached or is about to reach peak production, after which rates will decline either slowly or quickly depending on a host of factors. Here again there are rival models and incommensurable data, most of them proprietary or, worse, a state secret: the quarrel over the idea of the resource curse was once conducted between social scientists in books and journal articles, but now everyone – the oil companies, the oil-producing countries, consulting and services firms, bankers and corporate raiders – is taking sides. The stakes therefore appear much higher. Unfortunately, Maass can’t be depended on to guide us through the thicket of technical disputes, let alone the politics, which are never simply a matter of mavericks – in this book represented by the Houston banker turned peak oil guru Matthew Simmons – rallying the public to do what is best for the country (or the world) against entrenched interests: Cambridge Energy Research Associates, Saudi Aramco, Exxon.

What journalists like Maass do best is dig beneath all the nation-building plans, appeals to the national interest and professions of selflessness on the part of politicians and investors. Some individuals are both politicians and investors. One such figure is Peter Galbraith, who until recently was deputy head of the UN mission in Afghanistan; he was forced out after claiming there had been a cover-up of fraud in the Afghan elections. Galbraith has been involved with Kurdistan since his campaign in the early 1990s to draw attention to Saddam Hussein’s crimes in the region. In 2005 he advised Kurdish leaders in negotiations to secure provisions in the Iraqi constitution that protected their oil rights. Then in October this year it was revealed that his company, Porcupine LP, has for a time been involved with a Norwegian oil company, DNO, which in December 2005 discovered the large Tawke oil field in Northern Iraq. Porcupine is currently in dispute with DNO following last year’s renegotiation of the agreement between the Kurdistan Regional Government and DNO that barred third-party interests in Kurdish oil fields; the matter is currently under confidential arbitration. Galbraith claims that he has a ‘contractual relationship’ with DNO, but no ‘third-party interest in an oil field’: it remains unclear what Galbraith and Porcupine stand to gain from the relationship. It is a story as old as the industry itself.

[*] ‘Carbon Democracy’ (Economy and Society 38, 2009).